questions on the global economy

7TH EDITION

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For Valerie, with love

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THE GUILFORD PRESS New York London

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Copyright © Peter Dicken 2015

Published in the United States of America by The Guilford Press A Division of Guilford Publications, Inc. 370 Seventh Avenue, Suite 1200, New York, NY 10001 www.guilford.com

All rights reserved

No part of this book may be reproduced, translated, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, microfilming, recording, or otherwise, without written permission from the publisher.

Printed and bound in Great Britain by Ashford Colour Press

This book is printed on acid-free paper

Last digit is print number: 9 8 7 6 5 4 3 2 1

Library of Congress Cataloging-in-Publication Data

Dicken, Peter. Global shift: mapping the changing contours of the world economy/Peter Dicken. — Seventh edition. pages cm Includes bibliographical references and index. ISBN 978-1-4625-1955-2 (pbk.) 1. Industries—History—20th century. 2. International economic relations. 3. International business enterprises. 4. Economic policy. 5. Globalization—Economic aspects. 6. Technological innovations—Economic aspects. I. Title. HD2321.D53 2015 338.09′051—dc23 2014029508

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Praise for Global Shift

SEVENTH EDITION

“Given the rapid changes in the configuration of the global economy, Global Shift, Seventh Edition, will be welcomed by academicians and assigned in graduate and undergraduate classes. While retaining the strengths that have made prior editions much adopted around the world, the seventh edition has been updated to weave in such important new topics as the impact of the recent global financial crisis, the global smartphone infrastructure, climate change, corporate social responsibility, and national and international inequality. Readable case studies and excellent fig- ures and graphs provide students with the empirical illustrations they need to understand the larger theoretical concepts. A remarkable update by the foremost economic geographer of globalization that should be on everyone’s reading list.”

—Martin Kenney, Department of Human Ecology, University of California, Davis; Senior Project Director,

Berkeley Roundtable on the International Economy

“Global Shift, Seventh Edition, continues to be a key resource for understanding the complexity of the global economy and the ongoing, often contentious negotia- tions among nations, corporations and locales. In addition to clearly outlining larger institutional and structural processes, Dicken provides a wealth of detailed new empirical material to explain how the outcomes of the global economy manifest in specific contexts. The book’s diverse concrete examples – such as the global production network of iPhones or corporate strategies to shield profits from taxation – are drawn directly from the headlines. An extremely valuable text for all courses on economic geography, globalization, international business and economics.”

—Matthew Zook, Department of Geography, University of Kentucky

“Given the dizzying pace of change in the global economy, it’s more important than ever to have a comprehensive point of reference to allow us to understand and map the transformations around us. Global Shift, Seventh Edition, is that book.

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vi PRAISE FOR GLOBAL SHIFT

While continuing to add new material on countries, sectors and the policies that shape global industries, Global Shift also provides a solid analytical framework that helps the reader navigate the new terrain. And its great graphs, diagrams and charts are a visual delight. If you had to use just one book to convey globalization’s promise and perils, this is the book I would recommend.”

—Gary Gereffi, Department of Sociology and Center on Globalization, Governance and Competitiveness, Duke University

“Not just an update, the seventh edition of Global Shift offers compelling theo- retical and empirical insights as it takes on the critical global political-economic processes and debates of our time. Dicken provides a welcome synthesis and inter- rogation of prevailing theories of the global economy and addresses such fraught issues as the 2008 financial crisis and the intensification of inequality. An amazing resource.”

—Erica Schoenberger, Department of Geography and Environmental Engineering, The Johns Hopkins University

“Global Shift defines the gold standard in the field of globalization studies, which it has had a large hand in defining. The revised seventh edition continues to accomplish what no other book in the field does – it presents a grounded but broad view of globalization, judiciously assesses the key debates and recognizes (but never drowns in) complexity. Global Shift combines an authoritative voice with meticulous documentation and outstanding illustrations; it’s the trusted source.”

—Jamie Peck, Canada Research Chair in Urban and Regional Political Economy, University of British Columbia

“I used this text in my undergraduate Global Apparel Industry Dynamics class. It is a valuable text that explains the critical components and dynamics of the global economy in a straightforward and engaging style that is accessible to undergradu- ates as well as graduates. Dicken provides important historical perspectives on the evolution of the global economy while keeping abreast of recent developments. Key industries are examined in a relevant manner, adding an extra dimension to the work. Global Shift will equip any young graduate/executive with important insights into the global characteristics of business environments.” —Peter Kilduff, Professor and Chair, Department of Apparel Merchandising and

Management, California State Polytechnic University, Pomona

“Global Shift has become the de facto textbook for middle- and upper-level courses in economic geography. Dicken synthesizes the economic, political and social complexi- ties of globalization in highly accessible prose. The case studies of various industries contribute to a better understanding of the processes of globalization.”

—Marc Vachon, Department of Geography, University of Winnipeg

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viiPRAISE FOR GLOBAL SHIFT

SIXTH EDITION

“A magnificent achievement. Since the publication of the first edition of Global Shift in 1986, Peter Dicken has constructed in successive editions a phenomenal record of the changing geography of capital accumulation on a world scale. This wholly new sixth edition of 2011 is an essential companion for anyone concerned to understand the rapid geographical shifts occurring in the world’s economic power relations in these stressful and troubled times.”

—David Harvey, Distinguished Professor, CUNY Graduate Center, New York

“A masterful new edition of a masterful text. Once again, Peter Dicken is at the cutting edge of the analysis of economic globalization and global trends. Global Shift is the authoritative text on these issues.”

—David Held, Co-Director, Centre for the Study of Global Governance, London School of Economics and Political Science

“Global Shift, Sixth Edition, continues to deconstruct globalization to show that distance (economic geography) still matters. Dicken uses insights from interna- tional business research to demonstrate that world business activity is more regional than global. Multinational enterprises are at the hub of global production networks and service delivery; they interact with governments and generally act as agents of economic development. In short, economic geography and interna- tional business are closely aligned in their approach to globalization.”

—Alan Rugman, Henley Business School, University of Reading, UK

FIFTH EDITION

“A comprehensive, balanced, thorough, interdisciplinary review of one of the critical issues of our time. A ‘must’ for anyone interested in globalization.”

—Stephen J. Kobrin, The Wharton School, University of Pennsylvania

“Impressive in the extent of empirical research, Global Shift successfully captures the historical continuities and basic changes marking the world economy. Peter Dicken’s new edition is a vividly written guide to globalizing processes.”

—James H. Mittelman, School of International Service, American University

“Global Shift, Fifth Edition, remains the benchmark for studies of the geography of glo- balization. In accessible prose, Dicken presents tightly argued propositions about the emerging economic landscape. The fields of international business, economic geography, international relations, and economic sociology can profitably use the book to commu- nicate the fundamentals of globalization. Clear, effective, and engaging case studies are

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viii PRAISE FOR GLOBAL SHIFT

ideal for classroom use. There is no other text with such a broad reach or appeal for anyone interested in understanding the contemporary international economy.”

—Amy K. Glasmeier, Department of Geography, The Pennsylvania State University

“Global Shift just keeps on getting better. There is no other source that gives you the full story on globalization in such a fluent and authoritative way. This book is not just recommended, but essential.”

—Nigel Thrift, Vice-Chancellor, University of Warwick, UK

“With this edition of Global Shift, Dicken confirms his mastery as one of the preeminent authorities in the study of globalization. This careful and penetrating analysis of the complexities of a unifying world should prove a seminal text for students, scholars, and policymakers. If you wish to explore beyond ‘flatland,’ I can’t recommend a better source.”

—William E. Halal, Department of Management Science, George Washington University

“The fifth edition of Global Shift remains at the top of the ever more crowded field of globalization texts. Peter Dicken is a master of weaving together new theoretical arguments, visually compelling charts and graphs, and insightful indus- try case studies. If you had to use just one book to convey globalization’s promise and perils, this is the book I would recommend.”

—Gary Gereffi, Department of Sociology and Center on Globalization, Governance and Competitiveness, Duke University

FOURTH EDITION

“Dicken identifies states and transnational corporations as the two key actors in the multiple processes of restructuring and institutionalization that we usually call the global economy. In so doing, he has written a political economy of globaliza- tion and produced a far more comprehensive account than is typically the case in books about the global economy, most of which tend to confine the analysis to firms and markets.” —Saskia Sassen, Ralph Lewis Professor of Sociology, The University of Chicago

“In these uncertain times, it is reassuring to have Peter Dicken as our guide to the world economy. No other commentator has his eye equally attuned to both the big picture of global corporations and capital flows, and the fascinating stories of local places, people, and industries. In this new edition of Global Shift, Dicken shows us once again why he has become one of the most respected social scientists studying the world of global business and economy.”

—Meric Gertler, Department of Geography, University of Toronto, Canada

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ixPRAISE FOR GLOBAL SHIFT

“The book presents not only a thorough and balanced description and analysis of globalization, but also a nuanced explanation of the globalization–antiglobalization debates and provocative examination of the distributional consequences of globaliza- tion. I will certainly continue to use Global Shift in my graduate seminar. In fact, I am contemplating using it in my introductory economic geography course as well.”

—Robin Leichenko in Economic Geography

“A solid 640-page text on the phenomena of globalization in the modern age … provides detailed case studies of crucial global industries, more than 200 updated figures and tables, and well serves to broaden and illustrate the critical points toward understanding the world’s economic future. This is an ideal text for classroom instruction and recommended to the attention of non-specialist general readers with an interest in understanding the complexities of global economics.”

—Library Bookwatch

“One of human geography’s minuscule number of ambassadorial texts. The social sciences, the humanities, and international business studies will be much poorer when Global Shift ceases emerging as regularly as a Tissot watch keeps time.”

— Kris Olds in Progress in Human Geography

THIRD EDITION

“Global Shift has become a landmark and a classic. It remains a popular text whose strength lies in its clear presentation and analysis of empirical data and in its focus on the production chain. This alone makes it a welcome corrective for the many speculative works on globalization based, as Dicken says, more ‘on rhetoric and hype than on reality’.”

—Paula Cerni in Review of Radical Political Economics

“By far the best and most readable account of the past three decades of economic globalization. Replete with maps, graphs, and tables, the book offers the clearest and most complete exposition of the scale and depth of the transformation currently affecting all societies.”

—John O’Loughlin in Lingua Franca

“A first-rate and eminently readable work, with a unique blend of empirical and conceptual material and an analytical depth rarely achieved in textbooks. The third edition of Global Shift continues to be one of the most useful, interesting, and readable texts in the field of economic geography. I thoroughly recommend it both to students of geography and to readers in other disciplines who are inter- ested in seeing what contemporary economic geography is really all about.”

—John Holmes, Department of Geography, Queen’s University, Kingston, Ontario, Canada

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Contents

List of Abbreviations xv Preface to the Seventh Edition xix About the Companion Website xxiv

1 What in the World Is Going On? 1 The end of the world as we knew it? 1 Conflicting perspectives on ‘globalization’ 4 Grounding ‘globalization’: geography really does matter 6

PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY 11

2 The Centre of Gravity Shifts: Transforming the Geographies of the Global Economy 13 The importance of taking a long view: the imprint of

past geographies 14 Roller-coasters and interconnections 16 Global shifts: the changing contours of the global economic map 24 The centre of gravity has shifted 35

PART TWO PROCESSES OF GLOBAL SHIFT 47

3 Tangled Webs: Unravelling Complexity in the Global Economy 49 Connections, connections 50 Institutional macro-structures of the global economy 52 Global production networks 54 Even in a globalizing world, economic activities are

geographically localized 67 Networks of networks 71

4 Technological Change: ‘Gales of Creative Destruction’ 74 Technology and economic transformation 75 Processes of technological change: an evolutionary perspective 75

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xii CONTENTS

Time–space shrinking technologies 83 Technological innovations in products, production systems and

organizational forms 99 Geographies of innovation 106

5 Transnational Corporations: The Primary ‘Movers and Shapers’ of the Global Economy 114 The myth of the ‘global’ corporation 115 Why firms transnationalize 118 How firms transnationalize 123 TNCs as ‘networks within networks’ 130 Configuring the TNCs’ internal networks 136 TNCs within networks of externalized relationships 153 Perpetual change: reshaping TNCs’ internal and external networks 165

6 The State Really Does Matter 173 ‘The state is dead’ – oh no it isn’t! 174 States as containers 178 States as regulators 183 States as collaborators 207

PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY 227

7 The Uneasy Relationship Between Transnational Corporations and States: Dynamics of Conflict and Collaboration 229 The ties that bind 230 Bargaining processes between TNCs and states 233

8 ‘Capturing Value’ within Global Production Networks 251 Placing places in GPNs 251 Creating, enhancing and capturing value in GPNs 253 Upgrading (or downgrading) of local economies within GPNs 258

9 Destroying Value? Environmental Impacts of Global Production Networks 279 Production–distribution–consumption as a system of materials

flows and balances 280 Disturbing the delicate balance of life on earth:

damaging the earth’s atmosphere 282 Fouling the nest: creating, disposing and recycling waste 292

10 Winning and Losing: Where You Live Really Matters 304 Location matters 305 Incomes and poverty 308 Where will the jobs come from? 322 Populations on the move 340

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Transnational Corporations xiiiCONTENTS

11 Making the World a Better Place 354 ‘The best of all possible worlds’? 355 TNCs and corporate social responsibility 357 States and issues of global governance 363 A better world? 380

PART FOUR THE PICTURE IN DIFFERENT SECTORS 393

12 ‘Making Holes in the Ground’: The Extractive Industries 395 Beginning at the beginning 396 Production circuits in the extractive industries 397 Global shifts in the extractive industries 400 Volatile demand 402 Technologies of exploring, extracting, refining, distributing 404 The centrality of state involvement in the extractive industries 408 Corporate strategies in the extractive industries 413 Resources, reserves and futures 419

13 ‘We Are What We Eat’: The Agro-food Industries 423 Transformation of the food economy: the ‘local’ becomes ‘global’ 424 Agro-food production circuits 425 Global shifts in the high-value agro-food industries 427 Consumer choices – and consumer resistances 430 Transforming technologies in agro-food production 433 The role of the state 437 Corporate strategies in the agro-food industries 440

14 ‘Fabric-ating Fashion’: The Clothing Industries 451 A highly controversial industry 452 The clothing production circuit 452 Global shifts in the clothing industries 453 Changing patterns of consumption 454 Technology and production costs 456 The role of the state 460 Corporate strategies in the clothing industries 462 Regionalizing production networks in the clothing industries 469

15 ‘Wheels of Change’: The Automobile Industry 477 All change? 478 The automobile production circuit 478 Global shifts in automobile production and trade 480 Changing patterns of consumption 482 Technological change in the automobile industry 484 The role of the state 487 Corporate strategies in the automobile industry 489 Regionalizing production networks in the automobile industry 499

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xiv CONTENTS

16 ‘Making the World Go Round’: Advanced Business Services 510 The centrality of advanced business services 511 The structure of advanced business services 512 Dynamics of the markets for advanced business services 514 Technological innovation and advanced business services 516 The role of the state: regulation, deregulation, reregulation 519 Corporate strategies in advanced business services 521 Geographies of advanced business services 530

17 ‘Making the Connections, Moving the Goods’: Logistics and Distribution Services 539 Taking logistics and distribution for granted 540 The structure of logistics and distribution services 541 The dynamics of the market for logistics services 544 Technological innovation and logistics and distribution services 545 The role of the state: regulation and deregulation of logistics

and distribution services 550 Corporate strategies in logistics and distribution services 553 Logistics ‘places’: key geographical nodes on the global

logistics map 562

Bibliography 566 Index 597

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List of Abbreviations

ABS Advanced business services AFTA ASEAN Free Trade Agreement ANCOM Andean Common Market APEC Asia-Pacific Economic Cooperation forum ASEAN Association of South East Asian Nations B2B Business-to-business B2C Business-to-consumer BAIC Beijing Automotive Industrial Corporation BIS Bank for International Settlements BRIC Brazil, Russia, India, China BSE Bovine spongiform encephalopathy CA Controlled atmosphere CAFTA Central American Free Trade Agreement CAP Common Agricultural Policy (EU) CARICOM Caribbean Community CCC Clean Clothes Campaign CFC Chlorofluorocarbon CIS Commonwealth of Independent States CIVETS Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa CKD Completely Knocked Down CME Coordinated market economy CMEA Council for Mutual Economic Assistance CRA Contingency Reserve Arrangement (BRICs) CSO Civil society organization CSR Corporate social responsibility CUSFTA Canada–US Free Trade Agreement DC Distribution centre ECB European Central Bank ECE Eastern and Central Europe EDB Economic Development Board (Singapore) EDI Electronic Data Interchange EEC European Economic Community EFTA European Free Trade Association

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xvi LIST OF ABBREVIATIONS

EMU European Monetary Union EOI Export-oriented industrialization EPB Economic Planning Board (South Korea) EPC Electronic product code EPOS Electronic point of sale EPZ Export processing zone ETDZ Economic and Technological Development Zone (China) ETI Ethical Trading Initiative EU European Union FAW First Auto Works FCCC Framework Convention on Climate Change FDI Foreign direct investment FSB Financial Stability Board FTAA Free Trade Area of the Americas G7 Canada, France, Germany, Italy, Japan, UK, USA G8 G7 plus Russia G20 Argentina, Australia, Brazil, Canada, China, France, Germany,

India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, UK, USA, EU

GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GCC Global commodity chain GCSO Global civil society organization GDP Gross domestic product GFA Global Framework Agreement GHG Greenhouse gas GII Global Innovation Index GM Genetic modification GNC Global network connectivity GNH Gross national happiness GNI Gross national income GNP Gross national product GPN Global production network GSM Global social movement GSP Generalized system of preferences GVC Global value chain HVF High-value food IATA International Air Transport Association IC Integrated circuit ICAO International Civil Aviation Organization ICFTU International Confederation of Free Trade Unions ICSR International corporate social responsibility ICT Information and communications technology

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Transnational Corporations xviiLIST OF ABBREVIATIONS

IFI International financial institutions ILO International Labour Organization IMF International Monetary Fund IMO International Maritime Organization IPCC Intergovernmental Panel on Climate Change ISI Import-substituting industrialization IT Information technology ITU International Telecommunication Union JIT Just-in-time JLR Jaguar Land Rover LAFTA Latin American Free Trade Area LAIA Latin American Integration Association LBL Labour Behind the Label LDC Less developed country LETS Local exchange trading system LME Liberal market economy LSP Logistics services provider MAI Multinational Agreement on Investment MBS Mortgage-based securities METI Ministry for Economy, Trade and Industry (Japan) MFA Multi-Fibre Arrangement MFN Most-favoured nation MINT Mexico, Indonesia, Nigeria, Turkey MIST Mexico, Indonesia, South Korea, Turkey MITI Ministry of International Trade and Industry (Japan) MNC Multinational corporation MPI Multidimensional Poverty Index MSW Municipal solid waste MVMA Motor Vehicle Manufacturers’ Association NAFTA North American Free Trade Agreement NDB New Development Bank (BRICs) NEM Non-equity modes of international production NGO Non-governmental organization NIE Newly Industrializing Economy NOC National Oil Company NTB Non-tariff barrier OECD Organization for Economic Cooperation and Development OFC Offshore financial centre OICA International Organization of Motor Vehicle Manufacturers OPEC Organization of the Petroleum Exporting Countries OPT Outward Processing Trade PGST Permanent global summertime PLC Product life cycle

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xviii LIST OF ABBREVIATIONS

ppm Parts per million PRC People’s Republic of China PTA Preferential trading arrangement QE Quantitative easing R&D Research and development RFID Radio frequency identification RIA Regional integration agreement RTA Regional trade agreement SAIC Shanghai Automotive Industrial Corporation SEZ Special Economic Zone (China) SME Small and medium-size enterprises SOE State-owned enterprise SPM Solid particulate matter SSA Sub-Saharan Africa SUV Sports utility vehicle SWF Sovereign wealth fund TCC Transnational capitalist class TCS Tata Consultancy Services TEU Treaty on European Union TNC Transnational corporation TNI Transnationality Index TPP Trans-Pacific Partnership TRIMS Trade-Related Investment Measures TRIPS Trade-Related Intellectual Property Rights TTIP Transatlantic Trade and Investment Partnership UNCTAD United Nations Conference on Trade and Development UNEP United Nations Environment Programme VOIP Voice Over Internet Protocol WCN World city network WHO World Health Organization WTO World Trade Organization WWW World Wide Web

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Preface to the Seventh Edition

What began, more than 30 years ago, as a one-off attempt to make sense of the changing geographies of the world economy has evolved, rather unexpectedly, into a longitudinal global project. Each successive edition, appearing at roughly four- or five-year intervals, has come to constitute a temporal and spatial ‘marker’ of the empirical changes in the configuration of the global economy and of changing interpretations of, and attitudes towards, ‘globalization’ and its effects on people and places.

Such a longitudinal perspective emphasizes the dangers of making hasty judge- ments about immediate events and extrapolating them into the future. What may seem to be dramatic changes at one moment in time can turn out to be ephem- eral perturbations when seen from a longer-term perspective. Indeed, underlying the turbulent surface of change there is a great deal of continuity: of slower mov- ing processes. Like the tectonic processes that reshape the earth’s physical crust, their build-up may take long periods of time before we become fully aware of the true magnitude of change. The plate tectonics of the global economic map, there- fore, are just as difficult to predict, but also as potentially catastrophic, as those of the earth’s physical map. It is this interplay between the short and the long term that makes a project like this so challenging.

The basic principles on which Global Shift is based derive from my deep belief that we need:

•• an approach to globalization that is firmly grounded in the real world but which is not merely empirically descriptive;

•• an approach that engages with the theoretical and ideological/political issues of globalization, drawing upon a wide range of literature and ideas;

•• an approach that allows us to adopt a more considered perspective on how the immediate ‘events of the moment’ fit into the longer-term underlying pro- cesses of global economic change so that we are not swept away by instant predictions about the future;

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xx PREFACE

•• an approach that recognizes that globalization is a profoundly complex set of interlocking economic, political and social processes that operate in highly uneven ways over space and time and in ways that are not easily predictable but which have immense effects (both positive and negative) on people’s lives.

With these principles in mind, the basic aim of this Seventh Edition, as of its six predecessors, is to provide a clear path through the dense thickets of what are large, often conflicting, often confusing, debates and arguments about globalization; to show how the global economy works and what its effects are. It tries to separate the reality from the hype; to provide a balanced, grounded – but emphatically not an uncritical – perspective on a topic often richer in rhetoric than reality.

What is new about the Seventh Edition? As in all the previous editions, I have set out to produce the most up-to-date and comprehensive account of economic– geographic globalization. Hence, all the empirical data have been fully updated using the latest available sources as of early 2014. (Of course, anybody who has worked on the global scale will appreciate that this inevitably means that the ‘latest’ data always lag behind what we would ideally like to have.) The illustrations, which form such an integral element of this book, are, for the first time, in full colour, which greatly enhances their effectiveness. Each is either completely new or has been redesigned. Every chapter has been completely revised and extensively rewritten not only to take into account new empirical developments, but also to incorporate new ideas on the shaping and reshaping of production, distribution and consumption in the global economy. There is specific discussion of some of the key issues that have come to the fore in recent years, including:

•• the continuing impact of the 2008 global financial crisis, an issue that perme- ates all of the chapters to a greater or lesser degree;

•• the growing controversy over the tax-avoiding strategies of transnational cor- porations and other aspects of corporate social responsibility within increas- ingly interconnected and shifting business networks;

•• the continuing debates over economic governance institutions and policies at the global, regional and national scales in the spheres of finance, trade and the environment;

•• the fundamental issues of employment, unemployment, inequality, poverty and development, both between and within developed and developing countries;

•• the real relevance of the so-called BRICs (and other over-simplifying categorizations);

•• the eurozone crisis and broader issues and conflicts within the EU.

One major structural change has been made for the Seventh Edition. The sectoral case studies that made up Part Three of previous editions have been moved to the end to become Part Four. The previous Part Four (‘Winning and Losing in the Global Economy’) becomes Part Three, to create a much more direct connection

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xxiPREFACE

between the discussion of the processes of global shift (Part Two) and the outcomes of these processes. This change, I think, improves the coherence and flow of the argument – at least I hope so.

Otherwise, Global Shift continues to be both a cross-disciplinary and a multilevel book. It deliberately spans, and draws from, a wide range of academic disciplines, including business and management, development studies, economics, economic geography, political science and sociology. At the same time, the book is designed for use at different levels. On the one hand, my aim is to make the book accessible to readers without any prior specialist knowledge by ensuring that all key terms are clearly defined, by avoiding excessive jargon and by making extensive use of graphics. On the other hand, for the specialist reader, each chapter contains end- of-chapter notes that connect to the extremely extensive and up-to-date research bibliography. Through such means, the book should be useful to undergraduate and graduate students and researchers, as well as to policy makers and to people in business. Certainly my experience of the reception of previous editions suggests that this is so.

***

With each successive edition, my debt to friends, colleagues and users of the book has widened and deepened. Indeed, without a rich network of friends and col- leagues from all round the world, a book like this simply could not exist. To all of them, I offer my sincere thanks and I hope they will forgive me for not mentioning them all by name. However, several people deserve special mention. First in line must be Nick Scarle, Senior Cartographer at the University of Manchester. Nick has been responsible for designing and producing all the illustrations for all seven edi- tions. Always superb, they have simply got better and better. Indeed, this book could not exist as it does without Nick’s creativity, commitment and enthusiasm. I am immensely grateful to him. Second, I continue to rely on – and to appreciate so very much – the stimulus and friendship of Neil Coe and Henry Yeung, forged through long collaboration on global production networks at the University of Manchester (though both are now at the National University of Singapore). They, together with Martin Hess, Roger Lee, Anders Malmberg, Liu Weidong, Jamie Peck, Adam Tickell, Kevin Ward and Ray Hudson, amongst many others, provide continuing support and friendship. I particularly want to thank the following colleagues for providing material and inputs for specific topics: Neil Coe (Chapters 3, 17), Martin Hess (Chapter 3), Mark Graham, Matt Zook and Martin Dodge (Chapter 4), Liu Weidong (Chapters 6, 10, 15), Gavin Bridge (Chapter 12), and James Faulconbridge (Chapter 16). Henry Yeung (NUS), David Inglis (Exeter University) and Richard Woodward (Hull University) have created invaluable guides to supplemental reading material for the website, while Fiona Moore (Royal Holloway University of London) has again done an excellent job in devising and producing the support materials for business and management users of the book. Of course, none of them bears responsibility for any errors or misinterpretations on my part.

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xxii PREFACE

I am, as ever, extremely grateful to the team at SAGE Publications in London. SAGE is a publisher for whom I am proud to write. In particular, my long-stand- ing editor, Robert Rojek, is the most caring, encouraging and stimulating pub- lisher and friend. Katherine Haw has, yet again, lavished enormous skill and care on creating a visually stimulating book. I would also like to thank Keri Dickens, Izzi Drury and Michael Ainsley for all their help and enthusiasm. Thanks, too, to Seymour Weingarten and the staff at The Guilford Press in New York, especially C. Deborah Laughton.

However, at the end of the day, as the saying goes, it all ultimately comes back to the people who matter to me most of all: my family. Michael, Sally, Jack and Harry in Switzerland, Christopher and Annika in Germany are all such great fun to be with. And then, above all, there is Valerie, who makes everything worthwhile and who (still) does so with so much love, humour and tolerance. This is for her.

Peter Dicken Manchester, 2014

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About the Companion Website

dicken_global_7e_PC4 PB AW.indd 7 06/11/2014 15:57

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Features of the Companion Website for Global Shift

On the companion website for Global Shift – www.guilford.com/dickenGS7 – you will find resources for each chapter:

•• Questions that test your understanding of the Applied Case Study and Further Reading for each chapter for Business, Management and Organization Studies

•• Suggested Further Reading for each chapter for Geography, Politics and Sociology; with an explanation of why each reading is important and relevant

•• A set of interactive flashcards, so you can always test your knowledge of key terms

In addition, there are Applied Case Studies for each chapter and video overviews by Peter Dicken of each section:

1 What in the World Is Going On? •• Video: Peter Dicken introduces the new, 7th edition of Global Shift: How do

we understand the complexity of globalization?: five approaches •• An Applied Case Study: How globalized was the world between 1880 and

1914? What are the differences between then and now?

PART ONE: THE CHANGING CONTOURS OF THE GLOBAL ECONOMY

2 The Centre of Gravity Shifts: Transforming the Geographies of the Global Economy •• Video: Peter Dicken introduces Part One of the new, 7th edition of Global

Shift: How the world is changing; patterns of trade, investment and production; the rise and fall of economies – all understood in the long-term context

•• An Applied Case Study: How important is the free circulation of labour to the formation of global networks? Hamada’s ‘Under the Silk Banner’

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xxv FEATURES OF THE COMPANION WEBSITE FOR GLOBAL SHIFT

PART TWO: PROCESSES OF GLOBAL SHIFT

3 Tangled Webs: Unravelling Complexity in the Global Economy •• Video: Peter Dicken introduces Part Two of the new, 7th edition of Global

Shift: How is change produced, what are the underlying processes, who are the key actors and institutions, who has the power, how do they all interact?

•• An Applied Case Study: How does a global civil society organization use global networks to promote and achieve its aims? Oxfam

4 Technological Change: ‘Gales of Creative Destruction’ •• An Applied Case Study: What can a transnational social democracy move-

ment show about the development of global networks and the unevenness of power relations? www.indymedia.org

5 Transnational Corporations: The Primary ‘Movers and Shapers’ of the Global Economy •• An Applied Case Study: How many ways can a transnational corporation be

transnational, how diverse can the strategies be to accomplish this end? ZwoBank and BMW

6 The State Really Does Matter •• An Applied Case Study: How does the state act globally outside of formal

policy making and economic activity? The Chinese diaspora

PART THREE: WINNING AND LOSING IN THE GLOBAL ECONOMY

7 The Uneasy Relationship Between Transnational Corporations and States: Dynamics of Conflict and Collaboration •• Video: Peter Dicken introduces Part Three of the new, 7th edition of Global

Shift: Winning and losing in the global economy, the complex relations between transnational corporations and states

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xxvi FEATURES OF THE COMPANION WEBSITE FOR GLOBAL SHIFT

•• An Applied Case Study: How does a company develop a ‘stateless’ image, and yet continue to have relationships with states, particularly with its home country? Deutsche Bank

8 ‘Capturing Value’ within Global Production Networks •• An Applied Case Study: How complex is the relationship for transnational

corporations between global and local within global production networks? McDonalds

9 Destroying Value? Environmental Impacts of Global Production Networks •• An Applied Case Study: How does social identity – factors like gender, class

and ethnic identity – relate to how individuals recycle? Waste

10 Winning and Losing: Where You Live Really Matters •• An Applied Case Study: Does the present period of globalization show the

emergence of a transnational elite, or ‘transnational capitalist class’? German business people and diplomats in London

11 Making the World a Better Place •• Video: Peter Dicken introduces Part Four of the new, 7th edition of Global

Shift: Variation across sectors – the processes of globalization involve the same actors but differ from case to case, sector to sector

•• An Applied Case Study: What are the ongoing arguments for and against micro-finance as a tool for alleviating global poverty? Micro-finance

PART FOUR: THE PICTURE IN DIFFERENT SECTORS

12 ‘Making Holes in the Ground’: The Extractive Industries •• An Applied Case Study: Is taking materials out of the ground a neutral

activity, or one which can be undertaken in more or less ethical ways? Shell

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xxvii FEATURES OF THE COMPANION WEBSITE FOR GLOBAL SHIFT

13 ‘We Are What We Eat’: The Agro-food Industries •• An Applied Case Study: How are labels and narratives used by pro- and

anti-genetic-modification factions to influence consumer choice? GM foods

14 ‘Fabric-ating Fashion’: The Clothing Industries •• An Applied Case Study: How is an African exporter influenced, formally

and informally, by global and local debates about gender, labour and centre– periphery relations? Lesotho

15 ‘Wheels of Change’: The Automobile Industry •• An Applied Case Study: What advantages and disadvantages has the most

recent period of globalization – since the 2008 global recession – brought? General Motors

16 ‘Making the World Go Round’: Advanced Business Services •• An Applied Case Study: How do ‘global cities’ act as hubs of networks

developed by transnational businesses, migrants, activists and others in global production networks? London

17 ‘Making the Connections, Moving the Goods’: Logistics and Distribution Services •• An Applied Case Study: Is e-tailing a completely different and revolutionary

development from conventional forms of retailing? Amazon.com

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One WHAT IN THE WORLD

IS GOING ON?

CHAPTER OUTLINE The end of the world as we knew it? 1 Conflicting perspectives on ‘globalization’ 4 ‘Hyper-globalists’ to the right and to the left 4 ‘Sceptical internationalists’ 5 Grounding ‘globalization’: geography really does matter 6

THE END OF THE WORLD AS WE KNEW IT?

During the past 50 years the world economy has been punctuated by a series of crises. Many of these turned out to be quite limited and short-lived in their impact, despite fears expressed at the time. Some, however, notably the oil-related recessions of 1973–9 and the East Asian financial collapse of 1997–8, were very large indeed, although neither of them came close to matching the deep world depression of the 1930s. And recovery eventually occurred. Meanwhile, during the last three decades of the twentieth century the globalization of the world economy developed and intensified in ways that were qualitatively very different from those of earlier periods. In the process, many of the things we used in our daily lives became derived from an increasingly complex geography of production, distribu- tion and consumption, whose geographical scale became vastly more extensive and whose choreography became increasingly intricate. Most products, indeed, developed such a complex geography – with parts being made in different coun- tries and then assembled somewhere else – that labels of origin began to lose their meaning. Overall, such globalization increasingly came to be seen by many as the ‘natural order’: an inevitable and inexorable process of increasing geographical spread and increasing functional integration between economic activities (Figure 1.1).

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WHAT IN THE WORLD IS GOING ON?2

And then … On 15 September 2008, the fourth largest US investment bank, Lehman

Brothers, collapsed. It was an unprecedented event, heralding the biggest global economic crisis since the 1930s. And this crisis is still ongoing. The repercussions of the financial collapse that began with the disaster of the US ‘sub-prime’ mort- gage market continue to be felt throughout the world, although to widely differ- ent degrees, as we will see throughout this book. Since 2008, for example, economic growth rates (production, trade, investment) have plummeted in most of the developed world, notably in parts of Europe but also in North America. In all these cases, job losses have been huge, and the fall in incomes of the majority of the population has been so serious as to place many more people and house- holds on the margins of survival. At the same time, the incomes and wealth of the top 1 per cent have continued to increase even more astronomically, creating enormous social tensions and an upsurge of popular resistance in many countries. The most obvious recent example is the Occupy movement, which first emerged in late 2011 as ‘Occupy Wall Street’, using ‘We are the 99%’ as its rallying cry. In comparison, some developing countries – the so-called ‘emerging markets’ – have experienced relatively high growth rates, leading some observers to talk of the emergence of a ‘two-speed world economy’. But that broad-brush picture, though valid in some respects, masks continuing and deep-seated issues of poverty and deprivation throughout the world. The notion that developing countries can somehow ‘decouple’ from the effects of financial crisis in developed countries is demonstrably far from the truth.

To individual citizens, wherever they live, the most obvious foci of concern are those directly affecting their daily activities: making a living, acquiring the

Figure 1.1 Globalization as inevitable trajectory

Extent of geographical spread of economic activities

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WHAT IN THE WORLD IS GOING ON? 3

necessities of life, providing the means for their children to sustain their future. In the industrialized countries, there is fear – very much intensified by the current financial crisis – that the dual (and connected forces) of technological change and global shifts in the location of economic activities are adversely transforming employment prospects. The continuing waves of concern about the outsourcing and offshoring of jobs, for example in the IT service industries (notably, though not exclusively, to India), or the more general fear that manufacturing jobs are being sucked into a newly emergent China or into other emerging economies, suddenly growing at breakneck speed, are only the most obvious examples of such fears. Such fears are often exacerbated by concerns about immigration, especially among lower-skilled workers who perceive, correctly or incorrectly, a double squeeze of jobs moving abroad and those at home being taken by immigrants on low wages. But the problems of the industrialized countries pale into insignifi- cance when set against those of the very poorest countries. The development gap persists and, indeed, continues to widen alarmingly.

Hence, the world continues to struggle to cope with the economic, social and political fallout of the unravelling of the global financial system which occurred with such sudden, and largely unanticipated, force in 2007–8. The spectacular demise of Lehman was only one of many casualties. But its collapse was highly symbolic. Lehman was one of those institutions that epitomized the neo-liberal, free market ideology (sometimes known as the ‘Washington Consensus’) that had dominated the global economy for the previous half century. This was the ideology of so-called free and efficient markets: that the market knew best and that all hindrances to its efficient operation – especially by the state – were undesirable. But in 2008, all this was sud- denly thrown into question. As one financial institution after another foundered, as governments took on the role of fire-fighters, and as several banks became, in effect, nationalized, the entire market-driven capitalist system seemed to be falling apart.

Question: does the economic turmoil that broke out in 2008 herald ‘the end of the world as we knew it’, ‘the end of globalization’? Well, it all depends on what we mean by ‘globalization’: it is important to distinguish between two broad meanings of the term:1

•• One is empirical. It refers to the actual structural changes that are occurring in the way the global economy is organized and integrated.

•• The other is ideological. It refers to the neo-liberal, free market ideology of the ‘globalization project’.

These two meanings are often confused. Of course, they are not separate but it is important to be aware of which meaning is being discussed.

It is too early to say whether the free market ideology has been irrevocably changed by the global financial crisis. Some think it has. Many more think it should be. Others believe that, once the dust finally settles, it will be business as usual. That may, or may not, be the case. But globalization, as we will see throughout this book,

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WHAT IN THE WORLD IS GOING ON?4

has never been the simple all-embracing phenomenon promulgated by the free market ideologists. We need to take a much more critical and analytical view of what is actually going on over the longer term; to move beyond the rhetoric, to seek the reality. That is one of the primary purposes of this book.

CONFLICTING PERSPECTIVES ON ‘GLOBALIZATION’

Globalization is a concept (though not a term) whose roots go back at least to the nineteenth century, most notably in the ideas of Karl Marx. Indeed, in the light of the post-2008 crisis, many observers – even some who could by no stretch of the imagination be regarded as ideologically on the left – recognize that Marx’s analysis of the development of global capitalism2 was extremely acute and highly relevant to today’s world. ‘Globalization’ as a term entered the popular imagina- tion in a really big way only in the last four decades or so. Now it is everywhere. A perusal of Web-based search engines reveals millions of entries. Hardly a day goes by without its being invoked by politicians, by academics, by business or trade union leaders, by journalists, by commentators on radio and TV, by consumer and environmental groups, as well as by ‘ordinary’ individuals. Unfortunately, it has become not only one of the most used, but also one of the most misused and one of the most confused terms around today. As Susan Strange argued, it is, too often,

a term … used by a lot of woolly thinkers who lump together all sorts of superficially converging trends … and call it globalization without trying to distinguish what is important from what is trivial, either in causes or in consequences.3

‘Hyper-globalists’ to the right and to the left Probably the largest body of opinion – and one that spans the entire politico- ideological spectrum – consists of what might be called the hyper-globalists,4 who argue that we live in a borderless world in which the ‘national’ is no longer rel- evant. In such a world, globalization is the new economic (as well as political and cultural) order. It is a world where nation-states are no longer significant actors or meaningful economic units and in which consumer tastes and cultures are homog- enized and satisfied through the provision of standardized global products created by global corporations with no allegiance to place or community. Thus, the ‘global’ is claimed to be the natural order, an inevitable state of affairs, in which time–space has been compressed, the ‘end of geography’ has arrived and everywhere is becom- ing the same. In Friedman’s terms, ‘the world is flat’.5

This hyper-globalist view is the one shown in Figure 1.1. It is a myth. It does not – and is unlikely ever to – exist. Nevertheless, its rhetoric retains an extremely

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WHAT IN THE WORLD IS GOING ON? 5

powerful influence on politicians, business leaders and many other interest groups. It is a world-view shared by many on both the political right and the political left. Where they differ is in their evaluation of the situation and in their policy positions:

•• To the neo-liberals on the right – the pro-globalizers – globalization is an ideo- logical project, one that, it is asserted, will bring the greatest benefit for the greatest number. Simply let free markets (whether in trade or finance) rule and all will be well. The ‘rising tide’ of globalization will ‘lift all boats’; human mate- rial well-being will be enhanced. Although the neo-liberal pro-globalizers recognize that such a state of perfection has not yet been achieved, the major problem, in their view, it that there is too little, rather than too much, globaliza- tion.6 Globalization is the solution to the world’s economic problems and ine- qualities. This, then, is the global manifestation of the ‘Washington Consensus’ referred to earlier: the ideology of free and efficient markets regardless of national boundaries.

•• To the hyper-globalizers of the left – the anti-globalizers – globalization is the problem, not the solution.7 The very operation of those market forces claimed to be beneficent by the right are regarded as the crux of the problem: they are a malign and destructive force. Free markets, it is argued, inevitably create inequalities. By extension, the globalization of markets increases the scale and extent of such inequalities. Unregulated markets inevitably lead to a reduction in well-being for all but a small minority in the world, as well as creating mas- sive environmental problems. Markets, therefore, must be regulated in the wider interest. To some anti-globalists, in fact, the only logical solution is a complete rejection of globalization processes and a return to the ‘local’.

‘Sceptical internationalists’ Although the notion of a globalized economic world has become widely accepted, some adopt a more sceptical position, arguing that the world economy was actually more open and more integrated in the half century prior to the First World War (1870–1913) than it is today.8 The empirical evidence used to justify this position is quantitative and aggregative, based on national states as statistical units. Such data reveal a world in which trade, investment and, especially, population migration, flowed in increasingly large volumes between countries. Indeed, such levels of international trade and investment were not reached again (after the world depres- sion of the 1930s and the Second World War) until the later decades of the twen- tieth century. In fact, international population migration has not returned to those earlier levels, at least in terms of the proportion of the world population involved in cross-border movement. On the basis of such quantitative evidence Hirst and Thompson argue that ‘we do not have a fully globalized economy, we do have an international economy’.9

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WHAT IN THE WORLD IS GOING ON?6

GROUNDING ‘GLOBALIZATION’: GEOGRAPHY REALLY DOES MATTER

Such national-level quantitative data need to be taken seriously. But they are only a part of the story. They do not tell us what kinds of qualitative changes have been occurring in the global economy. Most important have been the transformations in the where and the how of the material production, distribution and consumption of goods and services (including, in particular, finance). Old geographies of production, distribution and consumption are continuously being disrupted; new geographies of production, distribution and consumption are continuously being created. There has been a huge transformation in the nature and the degree of interconnection in the world economy and, especially, in the speed with which such connectivity occurs, involving both a stretching and an intensification of economic relationships. Without doubt, the world economy is a qualitatively different place from that of only 60 or 70 years ago, although it is not so much more open as increasingly interconnected in significantly different ways.

International economic integration before 1914 – and even until only a few decades ago – was essentially shallow integration, manifested largely through arm’s-length trade in goods and services between independent firms and through international movements of portfolio capital and relatively simple direct investment. Today, we live in a world in which deep integration, organized primarily within and between geographically extensive and complex global production networks (GPNs), and through a variety of mechanisms, is increasingly the norm.

Such qualitative changes are simply not captured in aggregative production, trade and investment data. For example, in the case of international trade, what matters are not so much changes in volume – although these are certainly important – as changes in its composition. There has been a huge increase in both intra-industry and intra-firm trade, both of which are clear indicators of more functionally fragmented and geographically dispersed production processes.10 Above all, there have been dramatic changes in the operation of financial markets, with money moving electronically round the world at unprecedented speeds, generating enormous repercussions for national and local economies. We certainly do not need to be reminded of what that means.

The crucial diagnostic characteristic of a ‘global economy’, therefore, is the qualitative transformation of economic relationships across geographical space, not their mere quantitative geographical spread. This involves ‘not a single, unified phenom- enon, but a syndrome of processes and activities’.11 There is not one ‘driver’ of such transformative processes – certainly not the technological determinism so central in much of the popular globalization literature. In other words,

globalization is a … supercomplex series of multicentric, multiscalar, multitemporal, multiform and multicausal processes.12

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WHAT IN THE WORLD IS GOING ON? 7

It is because of such complexity that it is totally naive, for example, to try to explain uneven development in terms of a single causal mechanism called ‘globalization’:

Establishing a link between globalization and inequality is fraught with difficulty, not only because of how globalization is defined and how inequality is measured, but also because the entanglements between globalization forces and ‘domestic’ trends are not that easy to separate out.13

Globalizing processes, therefore, are reflected in, and influenced by, multiple geog- raphies, rather than a single global geography: the local and the global are, in effect, inseparable.14 Although there are undoubtedly globalizing forces at work, we do not have a fully globalized world. In fact, as Figure 1.2 shows, several tendencies can be identified, reflecting different combinations of geographical spread and functional integration or interconnection rather than the unidirectional trajectory shown in Figure 1.1:

Figure 1.2 Processes and scales of global economic transformation

‘Pure globalization’

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•• localizing processes: geographically concentrated economic activities with vary- ing degrees of functional integration;

•• internationalizing processes: simple geographical spread of economic activities across national boundaries with low levels of functional integration;

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WHAT IN THE WORLD IS GOING ON?8

•• globalizing processes: both extensive geographical spread and a high degree of functional integration;

•• regionalizing processes: the operation of ‘globalizing’ processes at a more geo- graphically limited (but supra-national) scale, ranging from the highly inte- grated and expanding EU to much smaller regional economic agreements.

Globalization, then, is not an inevitable end-state but, rather, a complex, indeter- minate set of processes operating very unevenly in both time and space. As a result of these processes, the nature and the degree of interconnection between different parts of the world are continuously in flux. A major task, therefore, is to challenge some of the more egregious globalization myths:

•• The world is not flat (contra Friedman). •• The world is not borderless (contra Ohmae). •• Global corporations do not rule the world (contra Korten). •• Globalization is not always good (contra the neo-liberal hyper-globalizers). •• Globalization is not always bad (contra the anti-globalizers).

In trying to understand globalization and its impacts, therefore, we need to get real: to develop a firmly grounded understanding of both the processes involved and their impacts on people’s lives. Of course, there will always be differences of diagnosis, prognosis and recommended treatment. But at least these should be based on sound conceptual and empirical analysis.

This book is an attempt to do this through a closely linked four-part structure:

•• Part One focuses on the shifting contours of the global economic map: the ‘global shifts’ that are continuously reshaping the global economy and creating a pro- nounced shift in its geographical centre of gravity.

•• Part Two explores the complex and multifarious ways in which the actors, insti- tutions and processes that make up the global economy interact to produce global production networks; the ‘gales of creative destruction’ set in motion by new technologies; the increasingly complex and extensive production net- works created and controlled by transnational corporations; the actions of states in their roles as containers of distinctive institutions and practices, as competitors, and as collaborators with other states.

•• Part Three is concerned with ‘winning’ and ‘losing’ in the global economy, on the impact of these processes on people and places: the uneasy relationships between TNCs and states, as each tries to exercise bargaining power over the other; the problems for national and local economies of capturing value in global pro- duction networks; the destruction of value through environmental degrada- tion; the staggeringly uneven contours of development; and, finally, the questions of how the world might be made a better place for all.

•• Part Four presents six sectoral case studies to illustrate the diverse ways in which these processes actually operate in different contexts. The six cases have been

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WHAT IN THE WORLD IS GOING ON? 9

carefully chosen to range across the entire spectrum of economic activities, from the basic/primary industries of mineral extraction and agro-food pro- duction, through such key global manufacturing industries as clothing and automobiles, to the advanced business, financial, logistical and distribution services that provide much of the ‘lubrication’ of the global economy. Precisely how production networks are configured and operate, precisely how TNCs, states, labour, consumers and CSOs are involved, precisely how they are subject to technological pressures, varies enormously between different kinds of eco- nomic activity.

NOTES

1 See, for example, Chase-Dunn et al. (2000). 2 See Harvey (2011), Piketty (2014). 3 Strange (1995: 293). 4 A term introduced by Held and McGrew (2007: chapter 1). Jones (2010) provides a

valuable survey of ‘key thinkers’ in the globalization literature. See also Cameron and Palan (2004).

5 Friedman (2005). 6 For an example of this position, see Friedman (1999, 2005). More nuanced writers

within this general framework include Bhagwati (2004) and Wolf (2004). 7 See, for example, Greider (1997). 8 Hirst and Thompson (1992), Hirst et al. (2009). 9 Hirst and Thompson (1992: 394). 10 See Feenstra (1998), Gereffi (2005). A new initiative by the OECD and the WTO is

attempting to capture this more fragmented nature of international trade by decom- posing trade between countries according to the value added in each country. See OECD-WTO (2013).

11 Mittelman (2000: 4). 12 Jessop (2002: 113–14). 13 Amin (2004: 218). 14 See Massey (1994, 2005).

Want to know more about this chapter? Visit the companion website at www.guilford.com/dickenGS7 for free access to author videos, suggested reading and practice questions to further enhance your study.

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PART ONE THE CHANGING

CONTOURS OF THE GLOBAL ECONOMY

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Two THE CENTRE OF GRAVITY SHIFTS: TRANSFORMING

THE GEOGRAPHIES OF THE GLOBAL ECONOMY

CHAPTER OUTLINE The importance of taking a long view: the imprint of past geographies 14 Roller-coasters and interconnections 16 The volatility of aggregate economic growth 16 Growing interconnectedness within the global economy 17 Trade has grown faster than output 18 FDI has grown faster than trade 19 Structural imbalances in the world economy 21 Global shifts: the changing contours of the global economic map 24 Continuing geographical concentration within the global economy – but a changing focus 24 The USA still dominates the global economy – though less than it did 26 Europe is still a major player – but its performance is highly uneven 27 Emergence of the ‘transitional economies’ of Eastern Europe and the Russian Federation 27 ‘Back to the future’: the resurgence of Asia 28 Japan 29 The four tigers 29 China: rebirth of the dragon 30 Indian promise 33 Latin America – unfulfilled potential 33 The persistent peripheries 35 The centre of gravity has shifted 35

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PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY14

THE IMPORTANCE OF TAKING A LONG VIEW: THE IMPRINT OF PAST GEOGRAPHIES

Particularly at times of economic turbulence and uncertainty, it is all too easy to be dazzled by eye-catching forecasts about the changing shape of the global economy, especially potential winners and losers. Today, for example, we are pre- sented with predictions of the rise of new ‘miracle’ economies: BRICs, MINTs, CIVETS, MISTs.1 Such acronyms are seductive; people are always on the lookout for a catchy label, especially those responsible for them: notably investment bank- ers and business consultants. As we will see, some of these ‘acronym economies’ are more likely to be robust in the longer term than others. But we need to be careful in rushing to judgement, not least because of political uncertainties. After all, not so long ago, Yugoslavia was listed by the OECD as one of the world’s 10 leading newly industrializing economies.

In fact, the global economic map is always in a state of ‘becoming’. It is always, in one sense, ‘new’, but it is never finished. Old geographies of production, distribution and consumption are continuously being disrupted and new geographies are con- tinuously being created. The new does not totally obliterate the old; what already exists constitutes the preconditions on which the new develops. Today’s global eco- nomic map, therefore, is the outcome of a long period of evolution during which the structures and relationships of previous historical periods help to shape – though not to determine – the structures and relationships of subsequent periods. In that sense, we cannot fully understand the present without at least some understanding of the past. Indeed, traces of earlier economic maps – earlier patterns of geographical spe- cialization or divisions of labour – continue to influence what is happening today.

There are continuing debates over when we can first identify a ‘world’ or a ‘global’ economy. To some, this appeared during what has been called the ‘long sixteenth century’ (1450 to 1640)2 or with the ‘eighteenth century transition to an industrial world’.3 To others, the key period was the 1870s.4 Regardless, ‘by 1914 there was hardly a village or town anywhere on the globe whose prices were not influenced by distant foreign markets, whose infrastructure was not financed by foreign capital, whose engineering, manufacturing and even business skills were not imported from abroad, or whose labour markets were not influenced by the absence of those who had emigrated or by the presence of strangers who had immigrated. The economic connections were intimate …’5

Hence, over a period of 300 years or so, a global division of labour developed and intensified with industrialization, in which the newly industrialized economies of the West (led by the ‘Atlantic’ economies, notably the UK, some Western European countries, and later the USA) became increasingly dominant in a core–periphery con- figuration (Figure 2.1). Of course, over time, this structure became far more complex geographically. Some core economies declined to semi-peripheral status during the eighteenth century and new economies emerged, especially in the late nineteenth and early twentieth centuries. Figure 2.2 shows some of these dramatic changes,

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THE CENTRE OF GRAVITY SHIFTS 15

notably the steep decline of Asia and the emergence to unrivalled dominance of the USA, measured in terms of shares of global gross domestic product (GDP).

The broad contours of this core–periphery global economic map largely per- sisted until the outbreak of the Second World War in 1939. Manufacturing pro- duction remained strongly concentrated in the core: 71 per cent of world manufacturing production was concentrated in just four countries and almost 90 per cent in only eleven countries. Japan produced only 3.5 per cent of the world total. The group of core industrial countries sold two-thirds of its manufactured exports to the periphery and absorbed four-fifths of the periphery’s primary prod- ucts.6 This long-established global division of labour was shattered by the Second World War, which destroyed most of the world’s industrial capacity (outside North America). At the same time, new technologies were created and many existing industrial technologies were refined and improved.

Production of manufactured

goods.

Source of raw materials and foodstuffs. Market

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Figure 2.1 A simple geographical division of labour: core and periphery in the global economy

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PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY16

The world economic system that emerged after 1945 reflected both the new geo- political realities of the post-war period and the harsh economic and social experi- ences of the 1930s. The major geopolitical division of the world after 1945 was that between the capitalist West (the USA and its allies) and the communist East (the Soviet Union and its allies). In the West the economic order built after 1945 reflected the domination of the USA. Alone of all the major industrial nations, the USA emerged from the war strengthened, rather than weakened: by 1950 the USA accounted for more than one-quarter of global GDP. It had both the economic and technological capacity and the political power to lead the way in building a new order, as, indeed, it did. The Soviet bloc drew clear boundaries around itself and its Eastern European satellites and created its own economic system (the CMEA – Council for Mutual Economic Assistance or Comecon) quite separate, at least initially, from the capitalist market economies of the West until its final break-up in 1989.

ROLLER-COASTERS AND INTERCONNECTIONS

Two particularly important features have characterized the global economy since 1950: the increased volatility of aggregate economic growth and the growing interconnectedness between different parts of the world.

The volatility of aggregate economic growth The path of economic growth certainly does not run smooth. It is a real roller- coaster. Sometimes the ride is gentle, with just minor ups and downs; at other times, the ride is truly stomach-wrenching, with steep upward surges separated by vertigi- nous descents to what seem like bottomless depths. Booms and slumps are endemic.

Figure 2.3 shows this roller-coaster pattern. The years immediately following the Second World War were ones of basic reconstruction of war-damaged econo- mies. Rates of economic growth reached unprecedented levels; the period between the early 1950s and the early 1970s was seen as a ‘golden age’. In fact, it was more golden in some places than others, and for some people than others.7 But then, in the early 1970s, the sky fell in. The long boom went bust; the ‘golden age’ became distinctly tarnished.

Rates of growth again became extremely variable, ranging from the negative growth rates of 1982 through to two years (1984 and 1988) when growth of world merchandise trade reached the levels of the 1960s once again. But then, in the early 1990s, recession returned. In 1994 and 1995, strong export growth reap- peared. A similarly volatile pattern characterized the final years of the twentieth century. There was spectacular growth in world trade in 1997, followed by far slower growth in 1998 and 1999 (partly related to the East Asian financial crisis and to its contagious effects on other parts of the world). Then, once again, there

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THE CENTRE OF GRAVITY SHIFTS 17

was spectacular acceleration in world trade in 2000, followed by an equally spec- tacular bursting of the growth bubble, a problem certainly exacerbated (though not caused) by the 9/11 terrorist attacks on New York City and by the crisis in the IT (dotcom) sector of the so-called ‘new’ economy.

High growth rates returned once again. Then, in 2008, seemingly without warning, the deepest recession since the late 1920s suddenly occurred, triggered by the turmoil in the global financial system. In 2009, global exports declined by 12 per cent, in 2010 they recovered to grow by 14 per cent, in 2011 export growth was 5 per cent, in 2013 it had fallen again to around 2 per cent. The roller- coaster is back with a vengeance. Even short-term forecasts are proving very dif- ficult and frequently being revised.

Growing interconnectedness within the global economy One major characteristic of global economic growth, therefore, is its inherent volatility. A second is the increasing interconnectedness of the global economy. Such interconnectedness has three major dimensions:

1980 1990

1985 1995

2000 2005

2010 1960-69

1970-79

0

–2

–4

–6

–8

–10

–12

4

2

A ve

ra g

e a

n n

u a

l p

e rc

e n

ta g

e ch

a n

g e 6

8

10

12

14

OutputExports

Figure 2.3 The roller-coaster of world merchandise production and trade

Source: calculated from WTO International Trade Statistics, various issues

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PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY18

•• trade has grown faster than output; •• foreign direct investment has grown faster than trade; •• serious structural imbalances in the world economy have emerged.

Trade has grown faster than output Figure 2.3 shows that exports have grown much faster than output in virtually every year since 1960. In the second half of the twentieth century, world merchan- dise trade increased almost 20-fold while world merchandise production increased just over 6-fold. More and more production is now traded across national bounda- ries; countries are becoming more tightly interconnected through trade flows. This is reflected in the ratio of trade to GDP: the higher the figure, the greater the dependence on external trade. There is huge variation between countries in such trade integration. For example, international trade is bound to be more important for geographically small countries than for large ones, the result of a simple size effect (contrast, say, the USA with Singapore). However, in virtually all cases the importance of trade to national GDP has increased significantly, as Table 2.1 shows.

Table 2.1 The increasing importance of trade for national economies (exports + imports as a percentage of GDP)

1960 1970 1985 1995 2000 2011

By income group

High income 23.7 27.1 37.3 39.8 52.0 60.0

Middle income - - - 55.9 55.0 64.0

Upper-middle income 34.3 36.4 41.8 51.4 55.0 64.0

Lower-middle income - - - 58.7 53.0 63.0

Low income - 34.6 41.8 60.5 45.0 67.0

By region

East Asia and Pacific 20.1 18.6 35.7 58.3 62.0 70.0

China 9.3 5.2 24.0 40.4 44.0 58.0

India 12.5 8.2 15.0 27.7 27.0 54.0

Latin America and Caribbean 25.8 23.4 30.8 35.6 44.0 49.0

Sub-Saharan Africa 47.4 44.3 51.0 56.1 66.0 71.0

World 24.5 27.1 37.1 42.5 52.0 61.0

Source: based on Kaplinsky, 2004: Table 1; World Bank, 2013

Figure 2.4 maps the network of world merchandise trade. It shows the strong tendency for countries to trade strongly with their neighbours:

•• Europe is the world’s major trading region (39 per cent of the world total). Almost 70 per cent of that trade is intra-regional, that is between European countries themselves. Around 13 per cent of Europe’s exports go to Asia and 7 per cent to North America.

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THE CENTRE OF GRAVITY SHIFTS 19

•• Asia is the second most significant trade region (29 per cent of the world total): 57 per cent of its trade is conducted internally while 12 per cent of its trade goes to Europe and 9 per cent to North America.

•• North America (16 per cent of the world total) conducts around 38 per cent of its trade internally. Asia and Europe each account for 31 per cent of North America’s trade and Europe for 16 per cent.

CIS

Europe North America

Middle East

Asia Africa S & C

America

7,000

2,500

1,000

500

Total merchandise trade ($ billions)

Trade flows ($ billions)

Internal trade

External trade

700

350

100

<20

<20 billion not shown

Figure 2.4 The network of world trade by region

Source: calculated from WTO, 2012: Table A2

FDI has grown faster than trade A second indicator of growing interconnectedness is that the growth of foreign direct investment (FDI) has outpaced the growth of trade. ‘Direct’ investment is an investment by one firm in another, with the intention of gaining a degree of control over that firm’s operations. ‘Foreign’ direct investment, therefore, is direct investment across national boundaries to buy a controlling investment in a domes- tic firm or to set up an affiliate. It differs from ‘portfolio’ investment, through which firms purchase stocks/shares in other companies purely for financial reasons.

Although FDI grew very rapidly during the first half of the twentieth century, such growth was nothing compared with its spectacular acceleration and spread after the

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PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY20

end of the Second World War.8 Figure 2.5 shows that during the 1970s and into the first half of the 1980s the trend lines of both FDI and exports ran more or less in parallel. Then, from 1985 the rates of growth of FDI and exports diverged rapidly. With some exceptions, FDI grew faster than trade, though with very wide fluctuations since the onset of the global financial crisis in 2008. Divergence in growth trends between FDI and trade is extremely significant: it suggests that the primary mechanism of interconnectedness within the global economy has shifted from trade to FDI.

However, these trends in the growth of FDI and trade are not independent of one another. The common element is the TNC. The number of TNCs has grown expo- nentially over the past three decades. In 2009, there were around 82,000 parent com- pany TNCs controlling around 810,000 foreign affiliates.9 TNCs account for at least two-thirds of world exports of goods and services, of which a significant share is intra- firm trade. In other words, it is trade within the boundaries of the firm – although across national boundaries – as transactions between different parts of the same firm. The ‘ball park’ estimate is that approximately one-third of total world trade is intra- firm, although that is probably an underestimate. One calculation is that 90 per cent of US exports and imports flow through a US [T]NC, with roughly 50 per cent of US trade flows occurring between affiliates of the same [T]NC.10

20

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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FDI300

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e x

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FDI

Figure 2.5 Growth of foreign direct investment compared with exports

Source: calculated from UNCTAD World Investment Report, various issues

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THE CENTRE OF GRAVITY SHIFTS 21

Unlike the kind of trade assumed in international trade theory – that trade takes place on an ‘arm’s-length’ basis – intra-firm trade is not subject to external market prices but to the internal decisions of TNCs. Such trade has become even more important as the production networks of TNCs have become more complex and, in particular, as production circuits have become more fragmented and global. Such ‘disintegration of production itself leads to more trade, as intermediate inputs cross borders several times during the manufacturing process’.11 These are pro- cesses we will examine in detail in subsequent chapters.

A further measure of global integration, therefore, is the relative importance of inward and outward FDI to a country’s economy, measured by its GDP. The rela- tive importance of FDI to national economies has increased virtually across the board, a clear indication of increased interconnectedness within the global econ- omy. In 2011, global FDI stocks were 30 per cent of world GDP (compared with only 10 per cent in the early 1990s).12 But, as in the case of trade, the relative importance of FDI to national economies is highly variable. Table 2.2 shows this for a sample of countries. In virtually all cases, inward FDI has increased greatly in relative importance.

Structural imbalances in the world economy The flexing and fluxing global economic map is the outcome of the major global shifts that have occurred over the past few decades. It is made up of complex

1990 2012

Australia 24.8 39.0

Canada 19.4 35.9

Denmark 6.8 47.3

France 7.9 39.5

Germany 6.5 21.1

Ireland 78.8 113.9

Italy 5.3 17.7

Japan 0.3 3.5

Netherlands 23.3 74.2

Spain 12.7 47.0

Sweden 5.2 71.7

Switzerland 14.0 100.7

UK 20.1 54.4

USA 9.4 26.2

Czech Republic 2.5 69.6

Hungary 1.6 81.7

1990 2012

Poland 0.2 47.3

Argentina 6.4 23.2

Brazil 10.1 31.2

Chile 46.7 77.7

China 5.1 10.3

Hong Kong, China 262.3 552.8

India 0.5 12.2

Indonesia 6.9 23.4

Korea 1.9 12.7

Malaysia 21.7 43.6

Philippines 6.7 12.4

Singapore 78.5 252.3

Taiwan 5.9 12.5

Thailand 9.3 40.7

Vietnam 3.8 51.6

Table 2.2 Inward FDI as a share of GDP (%)

Source: based on data in UNCTAD, 2013a: Web Table 7

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PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY22

interconnections, most notably those constituted through networks of trade and FDI. But such flows have created huge structural imbalances within the global economy. Figures 2.6 to 2.8 map the geography of trade surpluses and deficits in manufacturing, services and agriculture. The accumulated result of these three sets of trade balances creates a huge dilemma for the global economy: the potential instability created by the fact that some countries have huge trade and current account surpluses while others have enormous deficits:

Countries with trade surpluses accumulated capital beyond their capa- city to absorb it. Many ran large current account surpluses and accumu- lated record reserves. Countries with trade deficits financed their current account by increased borrowing abroad … China’s current account surplus rose from 2 per cent of GDP in 2000 to an average of 10 per cent during 2005–07. The largest deficits were in high-income coun- tries, with the US accounting for more than half the world’s current account deficits. The US current account deficit increased from 4.3 per cent of GDP in 2000 to an average of 6 per cent in 2005–07 … As the global imbalances between savings and investment grew, countries with large deficits borrowed from countries with surpluses, while fast-grow- ing exporters depended on expanding markets in deficit countries. China and other surplus economies accumulated record reserves … and sent capital overseas. The US and other deficit countries consumed more and financed their deficits by issuing more debt and equity.13

1 20

100

400

800

Net merchandise trade balance

($ billions)

Trade deficit

Trade surplus

Figure 2.6 The pattern of merchandise trade surpluses and deficits

Source: calculated from WTO, 2012: Tables A6, A7

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THE CENTRE OF GRAVITY SHIFTS 23

1 10

50

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Net commercial services

trade balance ($ billions)

Trade deficit

Trade surplus

1

10

40

85

Net agricultural products

trade balance ($ billions)

Trade deficit

Trade surplus

EU27

Figure 2.7 The pattern of services trade surpluses and deficits

Source: calculated from WTO, 2012: Tables A8, A9

Figure 2.8 The pattern of agricultural trade surpluses and deficits

Source: calculated from WTO, 2012: Tables II.16, II.17

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PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY24

GLOBAL SHIFTS: THE CHANGING CONTOURS OF THE GLOBAL ECONOMIC MAP

So far, we have been concerned with broad trends in economic activity, emphasiz- ing the volatility and increasing interconnectedness of the global economy. Now we turn to look specifically at a number of key questions about its changing geography:14

•• Are we witnessing a major redrawing of the global economic map? •• Are the developing economies winning out at the expense of developed

economies? •• Is the centre of gravity of the global economy moving away from west to east?

Let us look at the evidence, bearing in mind that short-term trends may not be an accurate predictor of long-term realities.

Continuing geographical concentration within the global economy – but a changing focus Very substantial geographical shifts have undoubtedly occurred in the global economic map in the last few decades. At the broadest level, for example, the developing countries’ share of global GDP, exports and inward FDI increased remarkably between 1990 and 2012, as Figure 2.9 shows. This is truly an epochal shift. However, by no means have all developing countries shared in the kinds of spectacular growth experienced by some over the past few decades. The figures tend to be heavily influenced by a few ‘big hitters’, notably China most recently and, before that, the so-called four Asian ‘tigers’ (Hong Kong, Korea, Singapore and Taiwan). Of course, the popular bets, at least by some financial analysts, have recently been on the ‘acronym economies’ mentioned at the beginning of this chapter: the BRICs, MINTs, CIVETS, MISTs. These, it has been claimed, will become the major players in a future world economy. Maybe they will. Certainly they have experienced rapid rates of economic growth in recent years, but it is far from clear that this is sustainable in every case. Indeed, in early 2014, the effects of US policy changes on its ‘quantitative easing (QE)’ policy led to increased pressure on the financial markets of several major emerging market economies, raising fears of serious capital flight from some of them.15

Figure 2.10 compares annual GDP growth between 2005 and 2012 for devel- oped and developing countries as a whole and for a selection of individual coun- tries. The contrasts are striking: GDP growth rates for developing countries were consistently very much higher than those for developed countries, in a few cases spectacularly so. But by 2013, there were clear signs of slowdown among many of these emerging market countries. Indeed, both the IMF and the OECD suggested

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THE CENTRE OF GRAVITY SHIFTS 25

Figure 2.9 Developing countries’ increasing shares of production, trade and foreign direct investment

Source: calculated from World Bank and UNCTAD data

1 9

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FDI stocks

in 2013 that ‘momentum in the global economy is shifting away from emerging markets and back towards advanced economies after years in the doldrums’.16 It is also important to stress that catching up is a slow process; that is why the contours of the global economy tend to change far more slowly than the short-term data often suggest. Once again, we need to beware of extrapolating short-term predic- tions into long-term certainties.

–5

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2006 2008 20122010

Mexico

China

India

WORLD

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countries

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0A n

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e r

ce n

t)

5

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2006 2008 20122010

Japan

United States

United Kingdom

Developed

countries

EU27

WORLD

Germany

Figure 2.10 Annual GDP growth rates

Source: calculated from UNCTAD, 2013b: Table 1.1

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PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY26

In fact, the geographies of production, trade and FDI remain highly uneven and strongly concentrated. Around three-quarters of global manufacturing and ser- vices production, and around 90 per cent of world agricultural production, are concentrated in just 15 countries (Figures 2.13 to 2.15). Around one-fifth of world trade in goods, services and agriculture is generated by the two leading countries in each sector (Figures 2.16 to 2.18). The picture is similar in the case of FDI (Figure 2.19): more than 80 per cent of outward FDI stock originates from 15 countries. The leading two source countries – the USA and the UK – account for 30 per cent of the world total (Figure 2.20). Half of all the inward FDI in developing countries is concentrated in just five host countries; almost 30 per cent is concentrated in China and Hong Kong alone (Figure 2.21).

The USA still dominates the global economy – though less than it did The USA has been the pre-eminent force in the global economy for almost 100 years, having displaced the original industrial leader, the UK, early in the twentieth century. However, its dominance has been much reduced as other competitors have emerged (see Figures 2.13 to 2.20). The USA has been overtaken as the world’s leading manufacturing producer by China, although it is still the leading producer of commercial services (24 per cent). It remains the world’s biggest foreign direct investor, the largest exporter of commercial services and agricultural products, and the third largest exporter of manufac- tured goods.

Between 1980 and 2003, US GDP grew at an annual average rate slightly above the world growth rate. But, as Figure 2.10 shows, its more recent growth has been weaker. Over the longer run, the deterioration in the US position is most appar- ent in the trade data, although trade is a smaller proportion of GDP in the USA than in all its major competitors, apart from Japan. Nevertheless, the US share of world merchandise exports has fallen from 17 per cent in 1963 to 8 per cent in 2011. At the same time, its share of merchandise imports has surged from less than 9 per cent to 12 per cent. Although US merchandise exports have grown at around 5 per cent a year, imports have grown at between 8 and 9 per cent a year. As a result, as we have seen, the USA has an enormous trade deficit.

There have also been very substantial changes in the US position as a source of, and destination for, FDI. In 1960, the USA generated almost 50 per cent of all the world’s FDI, compared with around 20 per cent today. The biggest change, how- ever, has been in the country’s position as a host for FDI. Although the USA has attracted FDI for many decades, such inward investment was always a tiny fraction of the country’s outward FDI. However, the USA has become significantly more important as an FDI destination. Inward and outward FDI are now much more balanced than in the past.

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THE CENTRE OF GRAVITY SHIFTS 27

Europe is still a major player – but its performance is highly uneven Europe, as a region, is the world’s biggest trading area and the primary focus of global FDI. However, despite being the most politically integrated region in the world (see Chapter 6), the European economy is extremely diverse, experiencing variable rates of growth over the past two decades, as well as uneven rates of decline in the post- 2008 recession. Between 2000 and 2007, the average annual rate of GDP growth in the core European countries was 2.3 per cent, significantly lower than the world average of 3.2 per cent and way behind those of East Asia and, indeed, of Eastern Europe. That differential widened in the post-2008 period (Figure 2.10).

Prior to 2008, the fastest growing Western European countries were the more ‘peripheral’ economies of Finland, Norway, Greece, Ireland and Spain. However, the last three, together with Portugal, were devastated by the 2008 recession and experienced severe contraction. The major difficulties facing Europe arise primar- ily from the wide economic divergences between member states in what is now a 28-state union. In particular, the massive strains experienced by many EU economies in the post-2008 recession – especially those of the weaker countries within the eurozone – pose problems that have no simple solutions.

Germany is by far the biggest European economy: the fourth largest manufac- turing producer (after China, the USA and Japan), the second largest manufactur- ing exporter (recently overtaken by China), the third largest commercial services exporter and the third most important source of FDI.

Europe’s second biggest economy, the UK, has experienced the greatest long- term relative decline insofar as it once dominated the world. It is now only the 10th-ranked manufacturing producer. However, it is still the world’s second big- gest source of FDI and second biggest exporter of commercial services.

There are considerable differences in trade performance between individual European countries. Whereas France, the UK, Spain and Italy have merchandise trade deficits, Germany, the Netherlands and Sweden have surpluses. In contrast, in commercial services the UK has a big trade surplus, France and Spain modest surpluses, while Germany has a substantial deficit.

Europe remains a major magnet for inward investment as well as the leading source of outward FDI.

Emergence of the ‘transitional economies’ of Eastern Europe and the Russian Federation On 9 November 1989, the Berlin Wall came crashing down, making possible the reunification of West and East Germany. But this unforeseen event was of much broader significance. It represented both a concrete and a symbolic indicator of enormous geopolitical (and geoeconomic) change. The political collapse of the Soviet-led group of countries, and, indeed, of the Soviet Union itself, produced a group of so-called ‘transitional economies’: former command

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PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY28

economies that transformed themselves into capitalist market economies. The process of transition, from a centrally planned economic system, with a heavy emphasis on basic manufacturing industries, to a capitalist market system, was painful and turbulent in many cases. The kinds of industries favoured in the centrally planned system were less viable in the context of a highly competi- tive global economy, as were the kinds of industrial organization themselves. In 1985, for example, the Soviet Union accounted for almost 10 per cent of world manufacturing output; by the mid-1990s, the share of the Russian Federation was around 1 per cent. Today, its share is 2.5 per cent. Nevertheless, Russia – identified as one of the BRICs – has become an increasingly significant presence in the global economy, especially in terms of its wealth of extractive resources, including oil and gas.

The transitional economies within Europe are a very diverse group. No fewer than 11 of them have become members of the EU and are therefore subject to both its opportunities and its constraints. These economies achieved impressive export performances during the 1990s. Poland, Hungary and the Czech Republic each had double-digit export growth while the Russian Federation and Slovenia grew at around 7–8 per cent per year. Such growth was underpinned largely by inward FDI, which grew substantially from the early 1990s, especially in the Czech Republic, Hungary, Poland and Slovakia. Much of this was driven by the shift of parts of firms’ production networks from Western Europe to lower-cost Eastern European economies, as both the clothing and automobile industries demonstrate (see Chapters 14 and 15).17 Between 2000 and 2007, the annual aver- age growth rate of the leading Eastern European countries was 5.2 per cent, that of Russia was 6.6 per cent, on a par with, or even better than, some of the East Asian economies. However, the 2008 crisis created huge problems for these still rather fragile economies. Growth rates since then have been very low indeed, as has been the case in Europe as a whole as we have seen.

‘Back to the future’: the resurgence of Asia By far the most significant global shift in the world economy during the past 50 years was a real ‘back to the future’ event: the re-emergence of Asia as the world’s most dynamic economic region.18 As Figure 2.2 shows, in 1700 Asia dominated the world economy: its share of global GDP was 62 per cent compared with the West’s 23 per cent. But by 1950 those positions had been almost exactly reversed: the combined GDP of Western economies was almost 60 per cent; that of Asia (including Japan) was a mere 19 per cent. Much of this was due to the relative eco- nomic decline of China and India. In 1700, their combined share of global GDP was almost 50 per cent; by 1950, it had plummeted to less than 10 per cent. They had become totally peripheral. Today, the picture is so very different.

Although it often seems that the resurgence of Asia is just about China, it is, in fact, very much more than that. We can see it as a sequence of four developments:

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THE CENTRE OF GRAVITY SHIFTS 29

•• The rise of Japan after the Second World War. •• The rapid growth of what came to be called the ‘four tigers’: the newly indus-

trializing economies of Hong Kong, Korea, Singapore and Taiwan. This was followed by the emergence of a second tier of East Asian developing econo- mies, primarily Indonesia, Malaysia and Thailand.

•• The (re-)emergence of China – the ‘dragon’ – as the increasingly dominant player in the global economy.

•• The potential economic dynamism of India.

Japan The world has become so obsessed with China that we tend to forget just how spectacular Japan’s post-war economic growth really was. It is worth restating. Starting in the 1960s, Japan substantially transformed the global economy and laid the foundations for the subsequent development of other parts of East Asia. In the early 1960s, Japan ranked fifth in the world; by 1980 it had risen to second place. During the 1960s, Japan’s rate of manufacturing growth averaged 13.6 per cent per year: two-and-a-half times greater than in the USA and four times greater than in the UK. The Japanese economy continued to grow at very high rates throughout the 1970s and most of the 1980s. Japan’s share of world FDI grew from less than 1 per cent in 1960 to almost 12 per cent in 1990. As a result, ‘Japan Inc.’ came to be seen as the biggest threat facing both the USA and Europe, as a deluge of polemi- cal, protectionist literature (especially in the USA) at the time demonstrated.

In the late 1980s, however, Japan’s rapid growth rate fell as dramatically as it had risen in the 1960s, with the collapse of its so-called ‘bubble economy’. Between 1990 and 2003, Japanese GDP grew at an annual average rate of only 1.2 per cent and its manufacturing sector by a mere 0.7 per cent. Merchandise exports, which had grown at almost 9 per cent a year between 1980 and 1990, grew at less than 3 per cent a year between 1990 and 2003. Growth was even lower between 2000 and 2007 (a mere 1.7 per cent). The US fear of the Japanese threat receded; the ‘bash Japan’ literature virtually disappeared. Nevertheless, Japan remains the world’s third largest manufacturing economy and the second largest producer of commercial services. Japan’s decline has been very much exaggerated.

The four tigers At the same time as Japan was surging up the ranks of industrialized countries, a small group of East Asian developing countries also appeared on the scene as foci of manufacturing growth, especially in labour-intensive industries. The ‘pioneers’ were the so-called four ‘tiger’ economies of Hong Kong, Korea, Singapore and Taiwan. In terms of manufacturing production, for example,

•• Korea’s manufacturing sector grew at annual average rates of 18 per cent dur- ing the 1960s, 16 per cent during the 1970s, 13 per cent during the 1980s and 7 per cent during the 1990s (to 2003);

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PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY30

•• Taiwan’s manufacturing sector grew at rates of 16 per cent, 14 per cent, 8 per cent and 6 per cent respectively during the same periods.

Subsequently, Malaysia, Thailand and Indonesia also displayed extremely high rates of manufacturing growth.

In the global reorganization of manufacturing production and trade the increased importance of East Asia as an exporter of manufactures was unique in its magnitude. Seven East Asian NIEs (Korea, Hong Kong, Singapore, Taiwan, Indonesia, Malaysia, Thailand) increased their collective share of total world manufactured exports from a mere 1.5 per cent in 1963 to almost 20 per cent in 1999 (and remember that this period included the East Asian financial crisis of 1997–8, which had a devastating effect on most of the East Asian economies). By 2011, this share had declined to 13 per cent, largely as a result of the growth of China.

So, it is in their role as exporters that the East Asian economies are especially significant. In some cases the transformation of their domestic economies was spectacular. For example, in 1980, less than 20 per cent of Malaysia’s exports were of manufactures; by 1998 the figure was 79 per cent. In 1980 a mere 2 per cent of Indonesia’s exports were of manufactures; in 1998 almost half was in that cat- egory. Others show a similar transformation. But they now face a very different competitive environment. Between 2000 and 2007, these economies grew at an annual average rate of 5.2 per cent; significantly above the world average, but far lower than in their ‘golden age’.

China: rebirth of the dragon Without question, the most recent, and the biggest, development within East Asia – indeed in the global economy as a whole – is the (re-)emergence of China. China has rather suddenly become a hugely significant presence in the global economy and ‘China bashing’ has replaced the ‘Japan bashing’ of an earlier period. Between 1980 and 2003, China’s growth rate was the highest in the world, with annual aver- age rates of well over 10 per cent. This remarkably high rate continued through to 2007. The 2008 global crisis inevitably had an effect and growth slackened, but it was still of the order of 9 per cent. Even in 2012, China’s GDP grew by 7.8 per cent. Its average annual rate of growth of merchandise exports was 13 per cent in the 1980s and 14 per cent between 1990 and 2003. Exports as a share of China’s GDP increased from 38 per cent in 2002 to over 50 per cent in 2012. As a result, China is now the world’s largest manufacturing producer, the largest agricultural producer, the largest exporter of merchandise and the world’s second largest importer (Figures 2.13 to 2.16). China has, indeed, become a ‘mega-trader’ (Figure 2.11).19

Figure 2.12 shows China’s global trade networks in manufactures and fuels and mining products. The contrast between the two is striking. In the case of manu- factures, exports dominate: China’s main markets for its manufactures are other

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THE CENTRE OF GRAVITY SHIFTS 31

parts of Asia (42 per cent), Europe (21 per cent) and North America (20 per cent). In the case of fuels and mining products, imports dominate: China’s main sources for these commodities are Asia (33 per cent), the Middle East (22 per cent), Africa (13 per cent) and South and Central America (14 per cent).

The immense impact of China on the global economy over the past two dec- ades has been especially significant in three major ways:20

•• Through its effect on the prices of commodities. China is by far the world’s biggest consumer of steel, aluminium, copper, zinc and nickel.

•• Through its effect on the prices of manufactures, especially of labour-intensive products.

•• Through its impact on capital flows, because of its accumulation of huge cur- rent account surpluses and foreign currency reserves.

Overall, then,

the entry of China’s massive labour force into the global economy may prove to be the most profound change for 50, and perhaps even for 100 years … China’s growth rate is not exceptional compared with previous or current emerging economies in Asia, but China is having a more dramatic effect on the world economy because of two factors: not only does it have a huge, cheap workforce, but its economy is also unusually open to trade. As a result, China’s development is not just a powerful driver of global growth; its impact on other economies is also far more pervasive … China’s growing influence stretches much

0

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is e

e xp

o rt

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a sh

ar e

o f

w o

rl d

e xp

o rt

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e r

ce n

t)

5

10

15

20

25

1870 1913

1950 1973

1990 2000

2012 1929

Japan China

United States

United

Kingdom

Germany

Figure 2.11 The rise of China as a world ‘mega-trader’

Source: based on data in Subramaniam and Kessler, 2013: Table 2.2

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PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY32

Figure 2.12 China’s global trade network

Source: WTO, 2012: Table A22

Europe

CIS Korea

Japan

North America

C and S America

Taipei

Asia

Hong Kong China

Africa

Middle East

CHINA

175

50

10

1

Billion dollars

(b) Fuels and mining products

Europe

CIS Korea

Japan

North America

C and S America

Taipei

Asia

Hong Kong China

Africa

Middle East

CHINA

750

250

50

5

Billion dollars

(a) Manufactures

02_Dicken-7E_Ch-02.indd 32 18/11/2014 11:01:09 AM

THE CENTRE OF GRAVITY SHIFTS 33

deeper than its exports of cheap goods: it is revolutionising the relative prices of labour, capital, goods and assets in a way that has never hap- pened so quickly before.21

Indian promise Although most of the focus remains on China, recent attention has been drawn to the other very large Asian country (in population terms): India. Indeed, some commentators envisage a world economy that will increasingly be dominated by ‘Chindia’, defined by one writer as ‘where the world’s workshop meets its office’,22 an allusion to China’s growth as a manufacturer and to India’s growth in IT ser- vices. But beware the hype.

India has certainly shown spectacular growth in one specific type of economic activity: the outsourcing of IT services (software, data processing, call centres and the like). As such it has attracted huge publicity and a growing view that India could be ‘the next China’, given the size of its population and other advantages. That may be so. But, at present, the evidence is slender. India’s GDP growth rate between 1980 and 2003, though well above the world average at between 5 and 6 per cent, was half that of China during the same period. Between 2000 and 2007, this difference lessened but remained significant. More recently, however, India’s GDP growth has been only half that of China’s.

India is the world’s 11th largest manufacturing economy; China is number 1; India is not in the top 15 merchandise exporters, China is again number 1. Of course, it might be argued that India’s strength lies in services rather than in man- ufacturing. Certainly it is true that the share of services in India’s GDP is much higher than China’s: 56 per cent compared with 42 per cent. Conversely, India has only 14 per cent of its GDP in manufacturing, compared with China’s 30 per cent. Despite this, China generated one-third more commercial services exports than India in 2011. Unlike all the other fast-growing East Asian NIEs, India does not have a strong export base in manufactures. China’s merchandise exports are six times larger than India’s. Indeed, if India is ranked along with the leading NIEs of East Asia in terms of merchandise exports, India appears below Hong Kong, Korea, Singapore and Taiwan, despite being many times bigger than any of them. None of this is to suggest that India does not have the potential to become a really major economic power, but, at present, the evidence is rather thin.23

Latin America – unfulfilled potential The Latin American and Caribbean region is once again facing a crisis of devel- opment. In 2005–6, growth rates lagged behind those of emerging economies in Africa, Asia and Eastern Europe and, except in certain pockets, indicators of social and human development were uninspiring and levels of inequality remained the highest in the world.24

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PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY34

Latin American countries are among the most resource-rich in the world. Several also have a long history of industrialization. Some, like Brazil and Mexico, are, in population terms, very large indeed. And yet most of the Latin American economies have not figured very prominently in the redrawing of the global eco- nomic map. Certainly, their modest economic performance contrasts sharply with that of East Asia. Within Latin America itself, there is huge diversity between individual economies. In general, however, few of them have ‘punched their weight’ as exporters. Over the past 20 years, their average export growth has been significantly lower than that of the East Asian economies.

Recently, as we saw earlier, the money has been on Brazil, as one of the BRICs. However, Brazil’s GDP growth rate between 2000 and 2007 was by far the lowest of the four BRICs: half that of Russia, one-third that of China and less than half that of India. Its performance between 2008 and 2012 was rather stronger but, most recently, Brazil has been hit by the slowdown in commodity prices (especially by demand from China). Despite a long history of industrialization, and some undoubted successes (in automobiles, for example – see Chapter 15), Brazil’s involvement in the world economy is mainly in primary commodities (agriculture, mining products). As such, it is highly vulnerable to fluctuations in commodity prices. Like India, Brazil has enormous economic potential but such potential is still far from being realized.

Mexico, on the other hand, has fared rather better, though very unevenly. Its very high export growth rate in the 1990s reflected its increasing integration with the USA through the North American Free Trade Agreement (see Chapter 6). However, Mexico’s GDP growth between 2000 and 2007 was the lowest among the region’s major economies (2.6 per cent, well below the world average as well). It seemed to be failing to take advantage of its preferential access (including its geographical proximity) to the USA. In particular, Mexico was being out-com- peted in the US market by China:

Over half of Mexico’s non-oil exports are under partial or direct threat from their Chinese counterparts. This ‘threat’ comprises all but a hand- ful of Mexico’s top 15 exports. What is more, recent changes indicate that Mexico’s loss of export competitiveness to China may also be threatening the technological sophistication of its exports. Since 1994, Mexico has gained ground on China only in primary products … Thus, Mexico is losing out in sectors abundant in unskilled labor where value-to-transport costs are cheap, but holding steady in assem- bly sectors where transport costs are more significant, and NAFTA’s rules of origin serve as local content rules mandating that production stays in North America, such as lorries and autos.25

Recently, however, Mexico has performed much more strongly. Its competitive- ness vis-à-vis China in the North American market has strengthened because of

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THE CENTRE OF GRAVITY SHIFTS 35

its advantageous geographical proximity (expressed in terms of time and cost of delivery). Between 2008 and 2012, Mexico’s average annual GDP growth was 3.9 per cent compared with Brazil’s 0.9 per cent.

The persistent peripheries Alongside the areas of strong, though differential, economic growth in the global economy – the peaks as it were – are those parts of the world whose economic growth remains very limited. These are the ‘persistent peripheries’. All of the maps shown at the end of this section tell more or less the same story: much of the con- tinent of Africa, parts of Asia and parts of Latin America constitute the ‘troughs’ of the global economic map. Sub-Saharan Africa (SSA) is the largest single area of ‘economic peripherality’. These are the parts of the world enmeshed in the deepest poverty and deprivation and whose existence poses one of the biggest social chal- lenges of the twenty-first century.

But not all is gloom, by any means. Indeed, growth rates in many parts of Africa have risen substantially (albeit from very low base levels). According to the World Bank in 2013:

The economic outlook for Sub-Saharan Africa is positive with growth rising to 5.3% in 2012 and 5.6% in 2013 … African exports rebounded notably in the first quarter of 2012, growing at an annual pace of 32%, up from the –11% pace recorded in the last quarter of 2011. Growth has been widespread, with over a third of SSA countries posting six per cent or higher rates with another 40% growing between four to six per cent. Among fast-growing countries in 2011 were resource- rich countries such as Ghana, Mozambique and Nigeria.26

However, the continuation of such growth, especially for those peripheral coun- tries heavily dependent on exporting commodities, is highly susceptible to exter- nal shocks. For example, there is no doubt that the insatiable demand by China for resources has driven recent growth in several African countries. Any major slow- down in Chinese growth, therefore, would have adverse effects. As always, there is the underlying danger of the ‘resource curse’ (see Chapter 10: p. 340).

THE CENTRE OF GRAVITY HAS SHIFTED

During the past six decades, the world economy has experienced enormous cyclical volatility, what we have described as the ‘roller-coaster’. Underlying such cyclical trends, however, are deeper, longer-term structural changes, notably in the geography of the global economy, which has become increasingly multi-polar. New

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PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY36

centres of production – new geographical divisions of labour – have emerged in parts of what had been, historically, the periphery and semi-periphery of the world economy. There have been big changes in the relative growth rates of different parts of the world. There has been a relative shift, in aggregate terms, from devel- oped to developing economies although this should not be over-stated or, indeed, taken for granted. Many parts of the world remain, to a greater or lesser degree, disarticulated from the engines of economic growth.

Without doubt, the biggest single global shift reshaping the contours of the global economic map is the resurgence of East Asia to a position of global significance, com- mensurate with its importance before ‘the West’ overtook it in the nineteenth century. But this has not been a sudden event. As we have seen in this chapter, the resurgence of East Asia since the 1960s was manifested, initially, in the rise of Japan, whose spec- tacular growth across a whole range of manufacturing sectors transformed competi- tive relationships in the global economy. The relative decline of the Japanese economy in the 1990s was, however, counterbalanced by the spectacular (re-)emergence of China. At the same time, the original four ‘tiger’ economies continued to consolidate their strengths. The result is an undoubted shift in the centre of gravity of the world economy, a shift that seems now to be on solid foundations and not a mere passing phase.

But what of the future shape of the global economic map? It is always tempting to extrapolate recent trends. There is, of course, some logic in this. After all, there is a strong element of path dependency in human affairs. But it is not as simple as that. Path dependency does not mean determinacy. All paths have branching points: some go off in unexpected directions, others into dead-ends. Hence, it is almost impossible to identify with certainty which contemporary events and cir- cumstances will have long-lasting effects. For example, when the East Asian finan- cial crisis broke with such suddenness in 1997, the literature was full of prophecies of doom: the end of the East Asian ‘miracle’ had arrived. The future of the region was dire. Few would make those same predictions today. What of the outcome of the post-2008 financial crisis? Because we are still in the thick of it we cannot really see how the world will look in a few years’ time.

Similarly, looking a little further back in time, who, from the standpoint of 1960, would have predicted that Japan would soon challenge the USA as an economic power and, in some respects, overtake it to the extent that, in the 1980s, doomsay- ers in the USA were lamenting the demise of their country as the world’s leading economy? Japan bashing became a national pastime (and not only in the USA – there were outbreaks in Europe, too, especially in France). Who would have pre- dicted that the Japanese economy itself would suddenly find itself deep in economic recession lasting for more than a decade and a half?

Who would have predicted that South Korea would become one of the world’s most dynamic economies within the space of 20 years or so? After all, in 1960, South Korea was one of the poorest countries in the world, with a per capita income comparable with that of Ghana. Which observer in the early 1970s would have predicted that China would open up its economy and become, in a very

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THE CENTRE OF GRAVITY SHIFTS 37

short time, the most dynamic economy in the world? Or that the command economies of the Soviet Union and Eastern Europe would, by the end of the 1980s, begin to be transformed into capitalist market economies? Such examples should make us wary of prediction. But we do not learn. We are seduced, far too easily, by big numbers and by spectacular events. We focus too eagerly on the quantitative, rather than the qualitative, dimensions and processes of change.

This raises a much bigger question: will the tendency towards an increasingly highly interconnected and interdependent global economy intensify? Will the geographical centre of gravity continue to shift? Is ‘globalization’ an inexorable and unstoppable force? Not inevitably, as the period between 1919 and 1939 shows. During that time, the unprecedented openness of the world economy that had come into being in the period between 1870 and 1913 was largely reversed through the actions of states responding to recession through increased protec- tionism. It took several decades to return to a similar degree of openness, by which time the world was a very different place. Of course, the interconnections within the global economy are now much deeper – and faster – than in the past because of the ways in which the processes of production and distribution have been transformed. Primarily, this is because of the development of highly complex, geographically extensive, global production networks, which form the starting point of Part Two.

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PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY38

United States

China

Japan

Germany

United Kingdom

Italy

France

Korea

Russian Federation

Brazil

Indonesia

Spain

Mexico

India

Turkey

0 10 205 15

Percentage of world total

2,200

1,000

100

500

1

Manufacturing production 2011

($ billions)

Figure 2.13 The global map of manufacturing production

Source: calculated from World Bank, World Development Indicators, 2013: Table 4.2

02_Dicken-7E_Ch-02.indd 38 18/11/2014 11:01:10 AM

THE CENTRE OF GRAVITY SHIFTS 39

United States

Japan

Germany

United Kingdom

France

Italy

China

Spain

Korea

Brazil

Russian Federation

Mexico

India

Netherlands

Australia

0 5 20 2510 15

Percentage of world total

12,000

5,000

200 1,000

10

Services production 2011

($ billions)

Figure 2.14 The global map of services production

Source: calculated from World Bank, World Development Indicators, 2013: Table 4.2

02_Dicken-7E_Ch-02.indd 39 18/11/2014 11:01:11 AM

PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY40

China

India

United States

Brazil

Russian Federation

Indonesia

Turkey

France

Japan

Spain

Italy

Mexico

Argentina

Thailand

Pakistan

0 20 3010

Percentage of world total

750

250

100

25 1

Agricultural production 2011

($ billions)

Figure 2.15 The global map of agricultural production

Source: calculated from World Bank, World Development Indicators, 2013: Table 4.2

02_Dicken-7E_Ch-02.indd 40 18/11/2014 11:01:11 AM

THE CENTRE OF GRAVITY SHIFTS 41

<1 or no data

<10ImportsExports 10

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Germany

United States

France United Kingdom

Korea

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Germany

Japan Japan

Italy

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Netherlands France

Singapore

India

United Kingdom

Korea

Belgium

Italy

Canada

Canada

Russian Federation

Belgium

United States China

Hong Kong

Hong Kong

Saudi Arabia Singapore

0 012 8 124 8 4

Percentage of world exports Percentage of world imports

Figure 2.16 The global map of merchandise trade

Source: calculated from WTO, 2012: Tables A6, A7

02_Dicken-7E_Ch-02.indd 41 18/11/2014 11:01:12 AM

PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY42

<1 or no data

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2011 ($ billions)

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Singapore

0 84

Percentage of world imports

Germany

France

Netherlands

China

Japan

Singapore

Spain

Switzerland

United Kingdom

Ireland

Italy

India

United States

Hong Kong

Korea

0 124 8

Percentage of world exports

Figure 2.17 The global map of services trade

Source: calculated from WTO, 2012: Tables A6, A7

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THE CENTRE OF GRAVITY SHIFTS 43

EU 27

no dataImportsExports

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EU (external)

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Thailand

China

Brazil

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Canada

Mexico

Australia

Malaysia

New Zealand

Russian Federation

United States

India

Vietnam

0 124 8

Percentage of world exports

Figure 2.18 The global map of agricultural trade

Source: calculated from WTO, 2012: Tables II.16, II.17

02_Dicken-7E_Ch-02.indd 43 18/11/2014 11:01:14 AM

PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY44

<5 or no data

<25InwardOutward

25

500

2,000

5,191

FDI stocks 2012 ($ billions)

Figure 2.19• • The global map of inward and outward FDI Source: calculated from UNCTAD, 2013a: Annex Table 2

Figure 2.20 Changing shares of leading source countries in outward FDI

Source: calculated from UNCTAD, World Investment Report, various issues

0

2012

10 20

United States

Hong Kong

Belgium

United Kingdom

France

Switzerland

Netherlands

Australia

Spain

Japan

Italy

China

British Virgin Is.

Canada

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Sweden

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1960

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THE CENTRE OF GRAVITY SHIFTS 45

NOTES

1 The acronym BRIC (Brazil, Russia, India, China) was introduced in 2001 by the chief economist of the US investment bank Goldman Sachs, Jim O’Neill. He also coined the acronym MIST (Mexico, Indonesia, South Korea, Turkey) in 2011. CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa) was introduced by the Economist Intelligence Unit in 2009. MINT is a slight variant on MIST, Nigeria replacing South Korea.

2 Wallerstein (1979). 3 Kozul-Wright (1995: 137). 4 See Bayly (2004), O’Rourke and Williamson (1999). 5 O’Rourke and Williamson (1999: 2). 6 League of Nations (1945). 7 Webber and Rigby (1996: 6). 8 Historical trends in FDI are discussed by Dunning and Lundan (2008) and Kozul-

Wright (1995). 9 UNCTAD (2009: 17). 10 Blonigen (2006: 1). 11 Feenstra (1998: 34). See also Subramanian and Kessler (2013). 12 Subramanian and Kessler (2013: 7–8). 13 World Bank (2009a: 3). 14 In order to avoid breaking up the text, the detailed illustrations – Figures 2.13 to 2.21

– are gathered together at the end of the chapter. 15 Observer (2 February 2014). 16 Financial Times (4 September 2013). 17 Smith (2013).

Figure 2.21 Concentration of inward FDI in developing countries

Source: calculated from UNCTAD, World Investment Report, various issues

Hong Kong

Korea

India

China

Singapore

Chile

Brazil

Malaysia

Argentina

Nigeria

Indonesia

Thailand

Mexico

0 0

1990 2012

5 10 5 1015 15 20

Percentage of developing country total

02_Dicken-7E_Ch-02.indd 45 18/11/2014 11:01:16 AM

PART ONE THE CHANGING CONTOURS OF THE GLOBAL ECONOMY46

18 Frank (1998) provides a long-run historical perspective. 19 Subramanian and Kessler (2013: 14–17). 20 Wolf (2008). See also Farooki and Kaplinsky (2012), Jacques (2012). 21 The Economist (20 July 2005). 22 Ramesh (2005). 23 See, for example, Saith (2008). 24 Phillips (2009: 231). 25 Gallagher et al. (2008: 1376). 26 World Bank, in 2013: www.worldbank.org/en/region/afr/overview.

Want to know more about this chapter? Visit the companion website at www.guilford.com/dickenGS7 for free access to author videos, suggested reading and practice questions to further enhance your study.

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PART TWO PROCESSES OF GLOBAL SHIFT

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03_Dicken-7E_Ch-03.indd 48 19/11/2014 10:42:58 AM

Three TANGLED WEBS:

UNRAVELLING COMPLEXITY IN THE GLOBAL ECONOMY

CHAPTER OUTLINE Connections, connections 50 Institutional macro-structures of the global economy 52 Global Production Networks 54 The ‘core’ of a GPN: transforming ‘inputs’ into ‘outputs’ 54 The dual role of services in GPNs 54 Financialization 56 GPNs as arenas of contested relationships 57 Transnational corporations 58 Territorial embeddedness of production networks: states as regulators in GPNs 60 Labour 61 Consumers 62 Global civil society organizations 64 The unevenness of power relations within GPNs 66 Even in a globalizing world, economic activities are geographically localized 67 The bases of geographical clusters 67 Why do clusters develop in the first place? 70 Networks of networks 71

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PART TWO PROCESSES OF GLOBAL SHIFT50

CONNECTIONS, CONNECTIONS

In Chapter 2, we mapped the changing contours of the global economy, noting its immense geographical unevenness and temporal volatility. We now turn, in the four chapters of Part Two, to the processes of globalization; to an explanation of how such global shifts are produced. However, this is far easier said than done. There are, emphatically, no simple explanations of what are extremely complex and interre- lated processes. So how and where do we start? What is a suitable point of entry?

The conventional unit of analysis of the global economy is the individual coun- try. It is not difficult to see why this should be so. Virtually all the statistical data on production, trade, FDI, and the like are aggregated into national ‘boxes’. However, such a level of statistical aggregation is less and less useful in light of the changes occurring in the organization of economic activities in today’s far more complex world. Unfortunately, in empirical terms, we have to rely heavily on national-level data to explore the changing maps of production, trade and FDI. But, because national boundaries no longer ‘contain’ production processes as they once did, we need to find ways of getting below the national scale – to break out of the constraints of the ‘national boxes’ – in order to understand what is really going on in the world.

The key to opening up these boxes lies in the notion of connectivity. As we saw in Chapter 1, a diagnostic characteristic of contemporary globalization is that the component parts of the world economy are increasingly interconnected in qualitatively different ways from the past. Another way of saying this is that the world economy consists of tangled webs of production circuits and networks that cut through, and across, all geographical scales, including the bounded territory of the state. It is through an analysis of such networks – their participants, their inter- connections, their power relationships – that we can begin to understand what is going on:

The critical point about networks is that they involve relational think- ing. What links people together across time and space? How are things and people connected and embedded economically, politically, and culturally? In what ways do goods and information and capital flow and why are they channelled down particular vertices and nodes? … Thinking in terms of networks forces us to theorize socioeconomic processes as intertwined and mutually constitutive.1

Figure 3.1 is based on such a network perspective. Its purpose is to provide both a structural perspective on globalization processes and outcomes and a sense of how the key ‘actors’ behave. In particular, it emphasizes the complex ways in which they are interconnected and governed through highly unequal power relationships. In fact, such a simplified diagram attempts the impossible: to capture and repre- sent the multidimensionality of the global economy in just two dimensions. It is

03_Dicken-7E_Ch-03.indd 50 19/11/2014 10:42:58 AM

TANGLED WEBS 51

an idealized representation of a world that is, in reality, infinitely more complex. Inevitably, it both grossly oversimplifies and distorts relationships and causalities. In particular, it is difficult not to imply a top-down set of processes whereas, in fact, we are dealing with a world of very complex, dynamically interconnected and simultaneous processes. So, the three layers in Figure 3.1 are not hierarchical ‘top- down’ levels but, rather, should be seen as three mutually interconnected ‘slices’. Chapter 2 was concerned with the bottom slice: it mapped some of the outcomes of globalizing processes; others will be examined in Parts Three and Four.

Macro-structures (institutions, conventions etc.) of capitalist market system

Circuits and networks of interaction, mediated through differential power relationships in global production networks and through transnational social networks

Uneven geographical distribution of ‘goods’ and ‘bads’; ‘winners’ and ‘losers’

Firms

Labour

States

Consumers

CSOs

P R

O C

E S

S E

S

S P

A C

E T

IM E

P R

O C

E S

S E

S –

Ev ol

ut io

na ry

tr aj

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rie s:

pa th

de pe

nd en

cy /c

on ti

ng en

cy

Sp ac

e as

‘re la

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)

P r o c e s s e s o f ‘e m b e d d e d n e s s’

P r o c e s s e s o f ‘e m b e d d e d n e s s’

’ gated s’Varie capitalism – geographically-specific configurations

of socio-cultural practices and institutions

O U

T C

O M

E S

Figure 3.1 A simplified analytical framework of the global economy

Source: based on Dicken, 2004: Figure 2

03_Dicken-7E_Ch-03.indd 51 19/11/2014 10:42:59 AM

PART TWO PROCESSES OF GLOBAL SHIFT52

We can cut into this highly interconnected system at many different points, according to our specific interest. But that necessitates understanding the relation- ships between the chosen ‘slice’ and the others. For example, the networks in the central slice of Figure 3.1 do not exist in isolation. They are simultaneously both deeply embedded in the broader institutional macro-structures of the global economy (the upper slice) and grounded in the prevailing geographical structures of the material world (the lower slice). Both history and geography matter. Previous structures and trajectories exert a powerful influence on present and future patterns and processes. As we saw in Chapter 2, the precise geographical configuration of the global economy at any one point in time constrains (though does not necessarily determine) future developments. It constitutes the context within which subsequent processes operate. The whole process is circuitous and highly path dependent.

In a similar vein, we must think of geographical scale in rather more nuanced ways than the conventional ‘global–local’ dichotomy allows. Figure 1.2 hinted at this. However, although terms like ‘global’, ‘local’, ‘national’ or ‘regional’ may be helpful, a network perspective forces us to think of geographical scale in a differ- ent way: as a continuum, rather than as a series of discrete ‘boxes’. Instead of being thought of solely in territorial terms, then, scale can also be conceived in topo- logical, that is relational, terms.2 Networks may be seen as being ‘more or less long and more or less connected’.3 But this sharp distinction between a territorial and a topological view of geographical scale should not be pushed too far. A topo- logical perspective is not, in itself, in conflict with the fact that, in terms of juris- dictional and regulatory practices, territorial scales of governance remain fundamental to the organization and operation of the global political economy and its constituent parts. Bounded political spaces matter. Some, like the nation-state, matter more than others (Chapter 6). In this sense, therefore, we have a very complex situation in which topologically defined networks (e.g. of TNCs, see Chapter 5) both ‘interrupt’ and are interrupted by political–territorial bounda- ries. What matters, however, is to think of territories not simply as ‘bounded’ spaces but, more importantly, as interrelated with a whole variety of other socially constructed scales of activity. Globalizing processes, therefore, can be thought of as an increasing multiplication of scales – local, national, regional, global – that overlap and interpenetrate in increasingly complex ways as the relationship between such scales changes.4

INSTITUTIONAL MACRO-STRUCTURES OF THE GLOBAL ECONOMY

The major actors in the global economy and the webs of networked relationships between them are enmeshed within the broader social, cultural, political and

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economic macro-structures of ‘rules, procedures and conventions’.5 The macro- structures of the contemporary global economy are essentially the institutions, conventions and rules of the capitalist market system. These are not naturally given but socially constructed – in their present form predominantly as a neo-liberal political–economic ideology, although the current crisis has raised big questions about this. Nevertheless, virtually the entire world economy has become a market economy.

Figure 3.2 maps the ‘thickening web of multilateral agreements, global and regional institutions and regimes, and transgovernmental policy networks and summits’6 that has developed. The IMF, the WTO and the World Bank, together with the various ‘G’ meetings (such as the G7, G8 and, more recently, the G20) and the many international standard-setting organizations are the most obvious manifestations of such global institutions, whose activities will be addressed at various points throughout the following chapters.

These global governance institutions are, themselves, only a part of the broader socio-cultural matrix of practices, rules and conventions that shape how the capi- talist market economy works. The rules and conventions relate to, for example, private property, profit making, resource allocation on the basis of market signals, and the consequent commodification of production inputs (including labour). Such institutions and conventions continue to be manifested in specific configura- tions in specific places (notably within nation-states, but not only at that scale). In other words, they are territorially embedded. The geographies of capitalism in the global economy, therefore, are highly variegated.7 ‘Capitalism’ is emphatically not the same everywhere.

Australia

Argentina

Brazil

China

India

Indonesia

Saudi Arabia South Africa

South Korea

Turkey

Mexico

Russia Germany Italy UK USFrance Canada Japan

WTO

Other regional

blocs

International standards

organizationsUN IMF World Bank

EU

G8

G20

G7

APEC

ASEANNAFTA

OECD

Figure 3.2 Major governance institutions in the global economy

Source: based in part on Cable, 1999: Figure 3.1

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GLOBAL PRODUCTION NETWORKS

The production, distribution and consumption of commodities, goods and services are set within this geographically differentiated, macro-structural framework and occur through complex webs of production circuits and networks. Although such circuits and networks operate at all geographical scales we will focus on global pro- duction networks (GPNs).8 The term ‘global’ does not necessarily imply that such networks actually span the entire world but, rather, it suggests that they are highly geographically extensive and functionally integrated across national boundaries.

The ‘core’ of a GPN: transforming ‘inputs’ into ‘outputs’

The core of a GPN is the circuit of interconnected functions, opera- tions and transactions through which a specific commodity, good or service is produced, distributed and consumed.

One point must be made absolutely clear: GPNs are emphatically not confined to physical commodities. Non-physical ‘products’, like financial services, for example, are just as much produced within a GPN as are the more obvious manufactured products.

Figure 3.3 identifies the major elements of a GPN: the four basic operations con- nected by a series of transactions between them. Inputs are transformed into ‘products’ that are distributed and consumed. But note that the processes are two-way. They form a circuit, rather than a chain. But there is much more to it than this, as Figure 3.3 shows:

•• Each individual element in a production circuit depends upon inputs of tech- nology, energy, services, logistics and finance. The whole circuit has to be coordinated, controlled and regulated.

•• The individual elements within a production circuit may be disaggregated, both organizationally and geographically.

The dual role of services in GPNs Services have a dual role in GPNs. On the one hand, services are produced within their own GPN. On the other hand, what are often called advanced business ser- vices (ABS) are fundamental to the operation of GPNs (see Chapter 16):

Service functions are assuming a more pivotal role in the production process. At one level, this is a reflection of a continuing escalation in the complexity of the division of labour … At another, profitability increasingly depends not just on the manufacturing part of the pro- duction process, but on the knowledge aspects and service functions within which products are embedded: R&D, design, brand creation, advertising, finance packages, service package or upgrade packages are now the sources of profitability.9

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Flows of materials and products

Flows of information (including customer orders)

FINANCIAL SYSTEM (investment capital, credit, banking)

REGULATION, COORDINATION, CONTROL

c

Research, design, quality control, product and process technologies

Technology inputs:

Electricity, oil, coal, gas, nuclear and renewables

Coordination of supply chains, movement of materials, products, people and information

Procurement, accountancy, insurance, human resources, legal, advertising, marketing, sales, maintenance

Energy inputs:

Logistical inputs:

Service inputs:

Inputs Transformation Distribution Consumption

Research, design, quality control, product and process technologies

Technology inputs:

Electricity, oil, coal, gas, nuclear and renewables

Coordination of supply chains, movement of materials, products, people and information

Procurement, accountancy, insurance, human resources, legal, advertising, marketing, sales, maintenance

Energy inputs:

Logistical inputs:

Service inputs:

Inputs Transformation Distribution Consumption

b

Inputs Transformation Distribution Consumption

of materials and non- materials

of inputs into semi-finished or finished goods or services

of the goods or services

of the goods or services

a

Figure 3.3 The basic components of a production circuit

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PART TWO PROCESSES OF GLOBAL SHIFT56

An especially significant category of services within GPNs is that of logistics, whose essential role is to intermediate between buyers and sellers at all stages of the pro- duction circuit (see Chapter 17).10 They involve not only the physical movement of materials and goods, but also the transmission and manipulation of information relating to such movements. They involve, above all, the organization and coordi- nation of complex flows across increasingly extended geographical distances:

[Such] service activities not only provide linkages between the seg- ments of production within a [production circuit] and linkages between overlapping [production circuits], but they also bind together the spheres of production and circulation … they not only provide geographical and transactional connections, but they integrate and coor- dinate the atomized and globalized production process.11

Financialization Of all the advanced business services, financial systems play the central role in GPNs. Every economic activity (whether a material product or a service) has to be financed at all stages of its production and distribution. The decisions of financiers, therefore, exert an extraordinarily powerful influence, not only in lubricating pro- duction circuits, but also in actually shaping them through their evaluative decisions on what (and where) to invest in order to gain the highest (and sometimes the quickest) return. But there is more to finance than this. One of the most significant developments of recent years has been the pervasive financialization of virtually all aspects of product, distribution and consumption.12

Financialization can be defined as

the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.13

Financialization, therefore, consists of much more than just the increased impor- tance of financial services firms. More and more non-financial (e.g. manufactur- ing) firms are now driven by motives of financialization and this connects closely into the growing incidence of geographically dispersed, tightly integrated GPNs controlled and coordinated by lead firms, primarily TNCs:

[T]he shareholder value revolution … beginning in the 1980s shifted power in corporate governance from managers to shareholders … This resulted in a change in corporate strategy from the … concern with firm growth, through retaining profits and reinvesting them, to an emphasis on shareholder value and short-run return on investment through downsizing the firm and distributing a greater share of profits back to shareholders … traditionally non-financial firms became more

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like financial holding companies, with a spectrum of financial services and financial investments swamping production in terms of their con- tribution to company revenues.

Largely coincidental with financialization in the 1980s was a growing tendency by firms to break up the process of producing goods and services and locate different parts in different locations depending on costs, markets, logistics or politics …

Financialization has encouraged a restructuring of production … And the rising ability of firms to disintegrate production vertically and internationally has allowed these firms to maintain cost mark-ups – and thus profits and shareholder value – even in a context of slower economic growth … global production strategies have helped to sus- tain financialization.14

In other words, financialization is an all-pervasive system of values based on the over- riding prioritization of an equity culture, in which ‘shareholder value’ and prof- itability have become central to all aspects of economic activity to the virtual exclusion of all other interests. It is a free market ideology in which regulation of financial markets is regarded with suspicion because it is seen to reduce market efficiency. The market is regarded as the most appropriate allocator of resources. The 2008 global financial crisis made nonsense of this claim. But what kind of future system will (or should) emerge is still unclear; this is an issue we will address in Chapter 11.

GPNs as arenas of contested relationships Individual production circuits (Figure 3.3) are, themselves, enmeshed in broader pro- duction networks of inter- and intra-firm relationships, that is relationships between and inside firms. Such networks are, in reality, extremely complex structures with intri- cate links – horizontal, vertical, diagonal – forming multidimensional, multilayered lattices of economic activity. They vary considerably both within and between different economic sectors, as the case study chapters of Part Four demonstrate.

In particular, GPNs are not simply technical–economic mechanisms through which the production, distribution and consumption of commodities, goods and services occur. They are

simultaneously economic and political phenomena … organizational fields in which actors struggle over the construction of economic relationships, governance structures, institutional rules and norms and discursive frames … GPNs thus exist within the ‘transnational space’ that is constituted and structured by transnational elites, institutions, ideologies.15

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In fact, it is primarily the actions of, and the interactions between, the five actor- centred networks shown in Figure 3.4 – TNCs, states, labour, consumers, civil society organizations – that shape the changing geographical configuration of the global economy through their differential involvement in production circuits and networks. Let us look briefly at each of these five actors. Much more will be said about each of them in subsequent chapters.

Civil Society Organizations

Transnational Corporations

States

ConsumersLabour

Inputs Transformation Distribution Consumption

Figure 3.4 Major actor-centred networks in the global economy

Transnational corporations In capitalist market economies, production networks are coordinated and reg- ulated primarily by business firms, through the multifarious forms of intra- and inter-organizational relationships that constitute an economic system. As Figure 3.5 shows, economies are made up of many different types of business organiza- tion – transnational and domestic, large and small, public and private – in varying combinations and interrelationships. The firms in each of the segments shown in Figure 3.5 operate over widely varying geographical ranges and perform rather different roles in the economic system.

A major theme of this book, however, is that it is the TNC that plays the key role in coordinating global production networks and, therefore, in shaping the geoeconomy:

TNCs are firms with the power to coordinate and control operations in more than one country, even if they do not own them.

In fact, TNCs often do own such assets but they are also, as we will see in Chapter 5 and in the case examples in Part Four, typically involved in intricate and multiple spiders’ webs of non-equity modes of international production (NEMs) with other legally independent firms across the globe.16

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TNCs vary enormously in their size and geographical spread. However, their significance lies in three basic characteristics:

•• their ability to coordinate and control various processes and transactions within GPNs, both within a