Is globalization dead?

Opinion by Walter Russell Mead, Los Angeles Times, Sunday 24 October 1999

The Third World hopes that manufacturing will make it as prosperous as the First World. But a century ago, agriculture was envisioned as the engine of a new prosperity. Look what happened.

For the last 15 years, we’ve all had a picture of the world economy in our heads. Manufacturing was moving from the First World to the Third, and with both goods and capital moving faster and faster, the world economy was becoming more closely connected all the time. The developing world was developing at a rapid clip, and we’d all live happily ever after.

Politicians bought this scenario and made globalization the cornerstone of U.S. foreign policy. Investors believed it and bet hundreds of billion of dollars in the U.S. and abroad that globalization was the wave of the future.

Was everybody wrong? Maybe. It's beginning to look as if a very nasty piece of history may be repeating itself: the great boom and bust that shook the developing world—and the whole world economy—a century ago.

Back then, there were two economic systems in the world: the age-old agricultural system and what was then the cutting-edge manufacturing economy.

At that time, developing countries saw a major opportunity. A side effect of the industrial revolution was a transformation of the technological basis for agriculture. Industrial technology made farming tools cheaper and more effective. At the same time, technology created new and cheap transport systems, like railroads and steamships, that could carry food crops to faraway markets.

Meanwhile, those markets were growing. As manufacturing cities mushroomed in Europe and on the U.S. East Coast, millions of city dwellers needed to buy food. Steelworkers didn’t have gardens, and if they did, with 12-hour shifts, six days a week, they didn’t have time to grow anything.

Farmers throughout the world rushed to take advantage of the new opportunities. Because farmland was, well, dirt cheap in “developing” countries, like the United States and Argentina, there was a huge expansion of farming in these countries. Under the 1862 Homestead Act, which offered 160 acres of public land free to anyone who lived on it for five years and filed a claim, an estimated 600,000 U.S. farmers registered claims with the government by the turn of the century. The amount of Argentine land used for wheat grew from 182,000 acres in 1872 to more than 2 million acres in 1888. In both countries, British investors pumped hundreds of millions of dollars into agricultural investments and the railroads set up to serve them.

British farmers moaned and whined about low-cost competition from developing countries, but everybody else saw an economic miracle. Ranching boomed in the American West, as well-connected young men like Theodore Roosevelt sought fortunes in the Montana cattle country. Rubber plantations created a wealthy planter class in the Amazon jungle, which supported a sumptuous opera house in Manaus. Sugar planters in Cuba built luxurious mansions that still are impressive architectural masterpieces.

Then the bottom fell out. Industrial technology, it turned out, made agriculture so productive that almost nobody could make a living at it. Supply exploded; prices fell hard and fast. Agricultural commodity prices have basically been falling in real terms throughout the 20th century and are falling today.

Countries that bet the ranch on ranching took it on the chops. The rubber, coffee and sugar booms in Latin America collapsed. “Rich as an Argentine,” the French used to say. In 1900, Argentina was the fifth-richest country in the world; today, it ranks 55th. In the United States, the family farms so hopefully founded during the great agricultural boom faded away. In 1900, 10 million Americans, or 37% of the civilian work force, worked on farms. Today, only 2.6% do, and most of them get by only with the help of subsidies. This year, the U.S. government spent a record $21 billion on direct payments to farmers, and that's not including subsidized water prices in states like California.

So here's the parallel: The cutting edge of today's economy is in high-tech services: telecommunications, data processing, transmission and storage, finance and insurance.

These new technologies made multinational manufacturing possible and opened up the Third World with its cheap labor and land to the manufacturing economy. The result: a manufacturing boom in countries like Malaysia, Thailand and Mexico similar to the rubber, sugar and wheat booms 100 years ago. Then it was opera houses in Manaus and Buenos Aires; now it's skyscrapers in Bangkok and Jakarta.

But now it's time to wonder if the rush to manufacturing will turn out to be a dead end, like the rush to agriculture a century ago. Will manufacturing become so productive, and the goods it makes become so cheap, that fewer and fewer people will be needed to make all the manufactured goods we require?

Something like that seems to be taking place in the United States. In 1970, 26% of the U.S. work force was in manufacturing; today, only 15% of the population has manufacturing jobs. If this rate of decline continues, by 2035, the percentage of Americans working in manufacturing will match the 2.6% now working on farms.

While some of that loss is due to low-wage competition from countries like China and Mexico, more is due to rising productivity worldwide. In 1955, America's primary metal industries (steel, iron, coke) produced 100 tons of metal a year for every production worker on the job. In 1997, each worker produced about 1,000 tons, and if productivity continues to grow at the same rate, by 2039, each worker will produce 10,000 tons.

For another sign of trouble, look at East Asia, where, after three decades of rapid growth, the “Asian tigers” and the tiger wannabes are in trouble.

Though many of Asia's financial markets have rebounded since the financial crisis of 1997-98, and some economies have begun to grow again, the glory days seem to be over. A recent Asia-Pacific Economic Cooperation study cut long-term growth prospects in Southeast Asia by one-third. Respected regional figures like Singapore's Senior Minister Lee Kwan Yew talk about the end of the Asian miracle. Look at Japan, one of the world's great manufacturing centers, where the economy has been essentially flat since 1989. Look at China, where falling prices and overcapacity in key industries threaten the progress and stability of one of the most competitive manufacturers in the world.

It's still too soon to say for sure, but it may well be that the world's manufacturers are working themselves out of a job the way the world's farmers did a century ago.

If true, this is bad news for the Third World, and there's worse to come. The businesses that are growing—health care for the elderly, delivery services for e-commerce companies, restaurants—often involve nontraded services: You can move a textile factory to Guatemala to cut down your wage costs, but try doing that with a restaurant.

If manufacturing shrinks in importance and nontraded services grow, trade will become less important to the overall health of the U.S. economy. Last year, imports and exports combined equaled 23% of the U.S. gross domestic product. That's high, but no higher than it was 200 years ago. Trade ebbs and flows. Trade was about twice as important to the U.S. economy in the 1870s as it was in the 1950s. It's possible that by 2020, the U.S. economy will be significantly less trade dependent than it is now.

This could well mean trouble, and not just in Asia. Mexico, South America and Mediterranean countries like Turkey are counting on the growth of manufactured exports to raise living standards and modernize their economies.

If the citizens of these countries lose faith that their living standards are rising, the 21st century will get very hairy very quickly.

That, too, has happened before. In 1899, the conventional wisdom thought that everybody was getting so rich, technology was getting so advanced and the world's economies were getting so closely interwoven that the 20th century would be the most peaceful in the history of mankind.

The optimists were wrong then—about globalization and about peace. Could we be making the same mistake now?