Colossus

by Niall Ferguson

  GLOBALIZATION

  Think, then, of liberal empire as the political counterpart to economic globalization. If economic openness—free trade, free labor movement and free capital flows—helps growth, and if capital is more likely to be formed where the rule of law exists and government is not corrupt, then it is important to establish not only how economic activity becomes globalized but also how—by what mechanism—economically benign institutions can be spread around the world.

  TABLE 8: GLOBALIZATION: AN OVERVIEW

  The fact that globalization applies to politics as well as economics is one of the messages of table 8. The first column lists what can be regarded as givens about the globe we inhabit; the second, those things that can flow around it; the third, the mechanisms that facilitate such flows; the fourth, the agencies operating these mechanisms; the fifth, the policies that allow those mechanisms to operate and the sixth, the possible international regimes.

  Economists and economic historians alike tend to focus their attention on flows of commodities, capital and labor when talking about the history of globalization. However, there are other flows that can also occur on a global scale, not only flows of technology and services but also flows of institutions, knowledge and culture. A particular event like a revolution or a bank failure can also be transmitted by a kind of mimesis around the world.45 And disease was globalized before any of these. The history of the fourteenth century would be incomprehensible without some knowledge of the bubonic plague, just as the conquest of the Americas by Europeans from the late fifteenth century until the mid-nineteenth would not have happened so easily without the export of infectious diseases, which more than decimated native populations. As well as infections, the conquistadors and colonists brought technology, institutions and ideas: gunpowder and the horse, Christianity and its various churches, West European notions of property, law and governance. Slow and erratic though it has been, the process of global democratization since the 1770s illustrates the way both institutions and ideas can be spread internationally as readily as goods can be traded across borders or money invested abroad. And the phenomenon of contagion, familiar to students of international financial markets, has its political counterpart in the international revolutionary epidemics after 1789, 1848, 1917 and 1989.

  If one leaves aside the mechanisms of the natural world, which can only really transmit infectious diseases (and not very far without man-made assistance), all these different things have been able to traverse the world only because of advances in the technology of transport and communications. It was above all improvements in the design of oceangoing ships, and increases in their number, that globalized the world economy in the nineteenth century, though the foundations of this revolution were laid earlier by advances in navigation, medicine and propulsion. Yet continued advances in the technology of transport and communications—the advent of aircraft, wireless transmission and satellites in space—were by themselves no guarantee of continued economic globalization. Much depended, and still depends, on the private and public agencies that control the means of communication. In the mid-twentieth century the encroachments of governments into economic life did much to reverse the economic integration of the pre-1914 period as more and more regimes adopted policies inimical to free international exchange.

  Economic historians tend to pay more attention to the ways governments can facilitate globalization by various kinds of deregulation (the first four items in the fifth column of the table) than to the ways they can promote globalization more actively. Yet the history of the integration of international commodity markets in the seventeenth and eighteenth centuries is inseparable from the process of imperial competition among Portugal, Spain, Holland, France and Britain. The creation of global markets for spices, textiles, coffee, tea and sugar were the work of monopoly companies like the Dutch and English East Indian companies, simultaneously engaged in a commercial and a naval contest for market shares. In the same way, the spread of free trade and the internationalization of capital markets in the nineteenth century were intimately linked to the expansion of British imperial power. On the other hand, the eclipse of globalization in the middle of the twentieth century was in large measure a consequence of the immensely costly and destructive challenges to British hegemony mounted by Germany and its allies in 1914 and 1939. Nothing did more than the world wars to promote alternative models of economic organization to that of the international free market. War was actively waged against seaborne trade, while it was the various wartime experiments with the control of trade and foreign exchange, the centralized allocation of raw materials and the rationing of consumption that provided the inspiration for theories of peacetime economic planning in the Soviet Union and elsewhere. The globalization of warfare in the twentieth century must bear a large share of the responsibility for the midcentury breakdown of international trade, capital flows and migration.

  It is certainly far from self-evident that an international order based on a multiplicity of notionally equal independent nation-states is the one best designed to maximize economic integration and to spread the institutions conducive to the success of free markets.46 In an ideal world, of course, free trade would be naturally occurring. But history and political economy tell us that it is not. The period after the Second World War saw great strides to reduce the tariff barriers that had arisen in the beggar-my-neighbor mood of the Depression, but under the Bretton Woods system, international capital movements were tightly regulated and indeed stayed that way even after the system of fixed exchange rates had broken down, until the 1980s. Nor has the resistance to liberal economic policies wholly disappeared even in our own era of globalization; there still remain formidable barriers to the movement of workers and agricultural products. No matter how persuasive the arguments for economic openness, it seems, nation-states cling to their tariffs, quotas and subsidies. By contrast, in the first era of globalization, from the mid-nineteenth century until the First World War, economic openness was imposed by colonial powers not only on Asian and African colonies but also on South America and even Japan.47 To be more precise, free trade spread because of Britain’s power and Britain’s example. It is to that first age of “Anglobalization” that we now turn, in order to assess both its costs and its benefits.

  ANGLOBALIZATION

  From the 1840s until the 1930s the British political elite and electorate remained wedded to the principle of laissez-faire, laissez-passer—and the practice of “cheap bread.” That meant that certainly from the 1870s, Britain’s tariffs were significantly lower than those of its European neighbors;48 it also meant that tariffs in much of the British Empire were kept low. Abandoning formal control over Britain’s colonies would almost certainly have led to higher tariffs being erected against British exports in their markets and perhaps other forms of trade discrimination; witness the protectionist policies adopted by the United States and India after they secured independence, as well as the tariff regimes adopted by Britain’s imperial rivals from the late 1870s onward. Whether one looks at the duties on primary products or those on manufactures, Britain was the least protectionist of the imperial powers. In 1913 average tariff rates on imported manufactures were 13 percent in Germany, over 20 percent in France, 44 percent in the United States and 84 percent in Russia. In Britain they were zero.49

  According to one estimate, the economic benefit to Britain of enforcing free trade could have been anywhere between 1.8 and 6.5 percent of GNP.50 But what about the benefit to the rest of the world? In the words of the Whig free trader Sir John Graham, Britain was “the great Emporium of he commerce of the World.”51 Its domestic market and much of its empire were more or less open to all comers to sell their wares as best they could. The evidence that, in an increasingly protectionist world, Britain’s continued policy of free trade was beneficial to its colonies seems unequivocal. Between the 1870s and the 1920s the colonies’ share of Britain’s imports rose from a quarter to a third.52 More generally, British colonial au
thorities resisted protectionist backlashes to the dramatic falls in factor prices caused by late-nineteenth-century globalization.53 That said, a distinction needs to be made between the majority of colonies, which had free trade thrust upon them, and the elite few that secured, through the granting of “responsible government,” the right to set their own tariffs. Canada did so in 1879, an example soon followed by Australia and New Zealand.54 Moreover, there appears to have been a positive correlation between the imposition of these tariffs and the economic growth of what became the Dominions—an apparently awkward finding for the proponents of unconditional economic “opennes.”55 This has important implications for any economic history of the British Empire. If Canada and the other Dominions benefited from protection, then the question becomes: would India have done better with tariffs? Happily for economic liberals, there is a difficulty with this line of argument. First, the tariffs imposed by Canada and others were designed to raise revenue, not to exclude imports. Canadian growth came from exports of agricultural products, not import substitution by domestic manufacturers.56 Secondly, the argument ignores the far more damaging effects of unfree trade on primary producers during the 1930s. The Depression was hard on everyone, but significantly harder on primary producers outside the system of imperial preference than those inside it.

  The evidence looks incontrovertible, then, that the British Empire fostered the integration of global markets for commodities and manufactures. Nor would there have been so much international mobility of labor without the British Empire. True, the independent United States was the most attractive destination for nineteenth-century emigrants. But as American restrictions on immigration increased, the significance of the white Dominions as a destination for British emigrants grew markedly, attracting around 59 percent of all British emigrants between 1900 and 1914, 75 percent between 1915 and 1949 and 82 percent between 1949 and 1963.57 This had important distributional consequences. It is often argued that the lion’s share of the returns on empire flowed to a tiny group of politically influential investors. But the effect of mass migration to land-rich, labor-poor colonies like Canada, Australia and New Zealand was to reduce global inequality.58 Nor should we lose sight of the vast numbers of Asians who left India and China to work as indentured laborers, many of them on British plantations and mines in the course of the nineteenth century. Perhaps as many as 1.6 million Indians emigrated under this system, which lay somewhere between free and unfree labor.59 There is no question that the majority of them suffered great hardship; some indeed might have been better off staying at home.60 But once again we cannot pretend that this mobilization of cheap and probably underemployed Asians to harvest gum or dig gold had no economic significance.

  Above all—and this is where Roosevelt and other critics of empire got it most wrong—the British Empire was an engine for the integration of international capital markets. Between 1865 and 1914 more than £4 billion flowed from Britain to the rest of the world, giving the country a historically unprecedented and since unequaled position as a global net creditor, “the world’s banker” indeed, or, to be exact, the world’s bond market. By 1914 total British assets overseas amounted to somewhere between £3.1 and £4.5 billion, as against British GDP of £2.5 billion.61 This portfolio was authentically global: around 45 percent of British investment went to the United States and the colonies of white settlement, 20 percent to Latin America, 16 percent to Asia and 13 percent to Africa, compared with just 6 percent to the rest of Europe.62 Out of all British capital raised through public issues of securities, as much went to Africa, Asia and Latin America between 1865 and 1914 as to the United Kingdom itself.63 This pattern was scarcely changed by the effects of the First World War and the Great Depression.64 As is well known, British investment in developing economies principally took the form of portfolio investment in infrastructure, especially railways and port facilities. But the British also sank considerable (and not easily calculable) sums directly into plantations to produce new cash crops like tea, cotton, indigo and rubber.

  It has been argued that there was therefore something of a Lucas effect in the first era of globalization—in other words, that British capital tended to gravitate toward countries with higher per capita GDP, rather than relatively poor countries.65 Yet the bias in favor of rich countries was much less pronounced than it is today. In 1997 only around 5 percent of the world’s stock of capital was invested in countries with per capita incomes of a fifth or less of U.S. per capita GDP. In 1913 the proportion was 25 percent.66 The share of developing countries in total international liabilities was 11 percent in 1995, compared with 33 percent in 1900 and 47 percent in 1938.67 Very nearly half the total stock of international capital in 1914 was invested in countries with per capita incomes a third or less of Britain’s,68 and Britain accounted for nearly two-fifths of the total sum invested in those poor economies. The contrast between the past and the present is striking: whereas today’s rich economies prefer to “swap” capital with one another, largely bypassing poor countries, a century ago the rich economies had very large, positive net balances with the less well-off countries of the world.

  Investing money in faraway places is always risky; what economists call informational asymmetries are generally greater, the farther the lender is from the borrower.69 Less developed economies also tend to be rather more susceptible to economic, social and political crises. Why, then, were pre-1914 investors willing to risk such high proportions of their savings by purchasing securities or other assets overseas? One possible answer is that the adoption of the gold standard by developing economies offered investors a kind of “good housekeeping seal of approval.”70 In 1868 only Britain and a number of its economic dependencies—Portugal, Egypt, Canada, Chile and Australia—had currencies that were convertible into gold on demand. France and the other members of the Latin Monetary Union, as well as Russia, Persia and some Latin American states were on the bimetallic (gold and silver) system, while most of the rest of the world was on the silver standard. By 1908, however, only China, Persia and a handful of Central American countries were still on silver. The gold standard had become, in effect, the global monetary system, though in practice a number of Asian economies, notably India, had a gold exchange standard (with local currencies convertible into sterling rather than actual gold), while some “Latin” economies in Europe and America did not technically maintain convertibility of notes into gold.71 This system of international fixed exchange rates may have encouraged international trade. Adherence to gold was also a signal of monetary and fiscal rectitude that allegedly facilitated access by peripheral countries to West European capital markets. It was a commitment mechanism, a way of affirming that a government would eschew irresponsible fiscal and monetary policies such as printing money or defaulting on debt.72 A commitment to gold convertibility, according to one estimate, reduced the yield on a country’s bonds by around forty basis points.73 To put it simply, that meant that countries on the gold standard could borrow more cheaply when they went cap in hand to the London bond market.

  As a contingent commitment, however, membership of the gold standard was nothing more than a promise of self-restraint under certain circumstances. Countries on gold retained the right to suspend convertibility in the event of an emergency, such as a war, a revolution or a sudden deterioration in the terms of trade. Such emergencies were in fact quite common before 1914. Argentina, Brazil and Chile all experienced serious financial and monetary crises between 1880 and 1914. By 1895 the currencies of all three had depreciated by around 60 percent against sterling. This had serious implications for their ability to service their external debt, which was denominated in hard currency (usually sterling) rather than domestic currency. Argentina defaulted in 1888–93, and Brazil in both 1898 and 1914. In other words, investors who pinned their faith in a country’s adoption of the gold standard had no guarantee that the country would not default. (Indeed, some countries made the chances of a default more likely by going on to gold durin
g the years of relative gold shortage between the mid-1870s and the mid-1890s, since falling commodity prices made it harder for them to earn from exports the hard currency they needed to service their external gold-denominated debts.)

  Altogether different was the kind of commitment that came with the imposition of direct British rule. This amounted to an unconditional “no default” guarantee; the only uncertainty investors had to face concerned the expected duration of British rule. Before 1914, despite the growth of nationalist movements in colonies from Ireland to India, political independence still seemed a distinctly remote prospect; even the major colonies of white settlement had been granted only a limited political autonomy. Moreover, the British imposed a distinctive set of institutions on their colonies that was very likely to enhance their appeal to investors: not only a gold-based currency but also economic openness (free trade as well as free capital movements) and balanced budgets—to say nothing of the rule of law (specifically, British-style property rights) and relatively noncorrupt administration.74 In other words, while investors who put their money in independent gold standard countries got little more than a promise not to print money, investors who put their cash in colonies could count not just on sound money but on the full range of Victorian “public goods.” It would therefore be rather puzzling if investors had regarded Australia as no more creditworthy than Argentina or Canada as no more creditworthy than Chile.

  We can measure the “empire effect” on international capital flows in two ways: the volume of capital that went to British colonies and the interest rates those colonies paid. According to the best available estimates, more than two-fifths (42 percent) of the cumulative flows of portfolio investment from Britain to the rest of the world went to British possessions. The imperial proportion of stocks of overseas investment on the eve of the First World War was even higher: 46 percent.75 It also seems clear that imperial possessions were able to borrow at lower rates of interest than independent countries (or the colonies of other powers). Britain and its principal possessions had among the lowest average bond yields for the period 1870 to 1914. By comparison, the yields on bonds issued by the Latin American economies, which also attracted substantial inflows of British capital without actually coming under British rule, were significantly higher. Argentine yields, to give just one example, were more than two hundred basis points higher than those on Indian bonds.76 Among twenty-three countries for which bond yield figures are readily available for the period 1870 to 1914, it is very striking that the five states that were members of the British Empire had the lowest rates, all averaging less than 4 percent. Only Norway and Sweden were able to borrow in London at rates lower than New Zealand and Australia. Egypt, which began the period outside the empire but became a de facto colony in 1882, saw a dramatic decline in its average yield from to 10.1 percent (1870–81) to 4.3 percent (1882–1914).77 The differential was even more pronounced in the interwar period, which saw major defaults by numerous independent debtor countries, including Argentina, Brazil, Chile, Mexico, Japan, Russia and Turkey.78 By the 1920s, at the latest, membership of the empire was therefore confirmed as a better “good housekeeping seal of approval” than gold.79 Experience showed that money invested in a de jure British colony such as India, or in a colony in all but name like Egypt, was more secure than money invested in an independent country such as Argentina. In turn, the low-risk premium paid by British colonies when they raised capital in London made it less likely that they would fall into the kinds of debt traps that claimed other emerging markets, whose interest payments out to foreign creditors exceeded the amounts of money flowing in from new loans and being generated by the foreign-financed investments.