THE

GREAT CONVERGENCE
Information Technology and the New Globalization

Richard Baldwin

The Belknap Press of

Harvard University Press
Cambridge, Massachusetts
London, England
2016
Copyrig�t © 2016 by the President and Fellows of Harvard College
All rights reserved
Printed in the United States of America

Fifth printing

Library of Congress Cataloging-in-Publication Data

Names: Baldwin, Richard E., author.

Title: The great convergence : information technology and the
new globalization / Richard Baldwin.
Description: Cambridge, Massachusetts : The Belknap Press of Harvard
University Press, 2016. j Includes bibliographical references and index.
I
Identifiers: LCCN 2016017378 ISBN 9780674660489 (alk. paper)
I
Subjects: LCSH: Globalization-Economic aspects. Income distribution. I
Economic geography. I Technological innovations-Economic aspects.
I
Classifica,tion: LCC HF1365 .B35 2016 DDC 337-dc23
LC record available at https://lccn.loc.gov/2016017378

Design by Dean Bornstein

 Introduction

This book aims to change the way you think about globalization. The
central assertion is that revolut�onary changes in communication
technology fundamentally"changed globalization around 1990. The
logic of how the revolution in information and c01nmunication tech-
- nology (ICT) transformed globalization and its impact on the world
is simple, but understanding it requires so�-� background. Let's start
'with some facts.
� Globalization t9ok a leap forward in the early 1800s, when steam
power and global peace lowered the costs of moving goods. Global­
ization made a second leap in the late twentieth century when ICT
radically lowered the cost of moving ideas. As Figure 1 shows, these
r�vo leaps-call them the Old and New Globalizations-had dra­
matically different effects on the world's economic geography.
--'· - From the early nineteenth century, falling trade costs fueled a
cycle
,_
of trade, industrialization, and growth that produced one of
history's most dramatic reversals of fortune. The ancient civiliza-
tions in Asia and. the' Middle East-which had . . ominated the world
economy for four millennia-were displaced in' less than two centuries
by today's rich nations. This outcome, which historians call the "Great
Divergence," explains how so much economic, political, cultural, and
military power came to be concentrated in the hands of so few.
From 1990, the trend flipped; a century's worth of rich nations'
rise has been reversed in just two decades. Their share is now back to
where it was jn 1914. This trend, which might be called the "Great Con­
verge11ce," is surely the· dominant economic fact of the last two or
three decades. It is the origin of much of the anti-globalization senti­
ment in rich nations, and much of the new assertiveness of "emerging
markets. "
80% ····· ... ....... · ···· - ..· · ··· ····· ···· · ·· ·--·-·· ···-···· - · ··· -······ · · ··· · ····· -·····--·· ··· ·-· ··· 182.0 ·········-······ - ....... .... .. ... . .... ........ ! 9 O
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FIGURE 1: Globalization changed around 1990: the "shocking share shift (G7 share
of world income).
Modern globalization, which started around 1820, was associated with the rapid in­
dustrialization of today's rich nations-represented in this chart by the Group of
Seven nations, or G7 for short (United States, Germany, Japan, France, Britain,
Canada, and Italy). This triggered a self-perpetuating spiral of industrial agglomera­
tion, innovation, and growth. that produced an epic shift in the world economy.
From 1820 to about 1990, the G7's share of global income soared from about a
fifth to almost two-thirds.
The upward spiral was checked from the mid-198os and reversed around 1990.
For the last couple of decades, the G7 share has been torqueing downward at a
mighty pace. Today it is back to the level that it first attained at the very beginning
of the nineteen century.
This shocking share shift suggests that the nature of globalization changed radi­
cally around 1990.
DATA SOURCE: World Bank DataBank (GDP in U.S. dollars) and Maddison­
project data pre-1960 (with author's calculations), http://www.ggdc.net/maddison
/maddison-project/home.htm; the 2009 version is used since the 2013 version does
not update world GDP (2009 version hereafter noted as Maddison database).

Accompanying Figure I's "shocking share shift" was a changeover

in manufacturing. Today's rich nations-which had seen their share
of world manufacturing slip slowly since 1970-witnessed an accel­
erated decline from 1990 (Figure 2).
Curiously, the Gis share loss showed up as share gains in very few
nations. Only six developing natio·ns (called the I6 in the chart, short
for the Industrializing Six) saw their share of world manufacturing

2.. INTRODUCTION
 80% ·-·-·-·--·-...................... --··-...................................................._..__..._,___..____.._............._..........__..___.._____............-...,....-

60%

40%

-- ...... ________:(_
RoW
----
20%

"i
0%

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0
0\
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O'\
0
00
O'\
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00
O'\
0
O'\
O'\
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0
0
0
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0
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1-4
0
1-4 1-4 1-4 1-4 1-4 1-4 r-1 r-1 r-1

FIGURE 2: The decline in rich nations' share of world manufacturing translated to

gains by just six developing nations.
The shift in global manufacturing shares was almost as stark as the "shocking share
shift" in Figurer. From around 1990, the slide in the Gis share accelerated and its
sh�re is now below 50 percent.
· Just six developing natio�s-which I call the Industrializing Six, or I6 for short
(China, Korea, India, Poland, Indonesia, and Thailand)-accounted for almost all
of the Gis decline. The manufacturing share of the rest of the world (RoW in the
chart) was largely unaffected by these changes. Note that China is a real standout.
Its share of world manufacturing (not shown separately) rose from about 3 percent
to almost a fifth.
DATA SOURCE: UNSTAT.org.

rise by more than three-tenths of one percentage point since 1990.

The curiosity lies in the fact that the effect is so concentrated.
Why should the impact of globalization be so narrow geographically
when cheap transportation and communication are so broadly avail­
able? Answering this question requires a broader view ofglobalization.

INTRODUCTION 3
A Broader View of Globalization

When transportation involved wind power by sea and animal power

by land, few items could be profitably shipped over anything but the
shortest distance. This fact made production a hostage of consump­
tion since people were tied to the land. Production, in other words,
was forcibly bundled with consumption.
Globalization can be thought of as a progressive reversal o.f this
forcible bundling. But the bundling was not enforced by shipping
costs alone. Three costs of distance mattered: the cost of moving
goods, the cost of moving ideas, and the cost of moving people. It is
useful to think of the three costs as forming th�e constraints that
limit the separation of production and consumption.
One of this book's core assertions is that understanding the evolving
nature of globalization requires a sharp distinction among these three
"separation" costs. Since the early nineteenth century, the costs of
moving goods, ideas, and people all fell, but not all at once. Shipping
costs fell radically a century and a half before communication costs
did. And face-to-face interactions remain very costly even today.
Thinking about why the sequence matters is facilitated by a new
view of globalization-what I call the "three cascading constraints"
perspective. The new view is best explained by lacing it onto the back
of a quick gallop through history.

The Pre-Globalized World and Globalization's First Acceleration

In the pre-globalization world, distance isolated people and produc­

tion to such an extent that the world economy was little more than a
patchwork of village-level economies. Things started to change when
the cost of moving goods fell. Transport technologies improved in a
process that fostered and was fostered by the Industrial Revolution.
With easier international shipping, more people bought faraway
goods. Middle-income Britishers could, for example, afford to dine

4 INTRODUCTION
 on bread baked with U.S.' wheat while sipping tea brewed from
Chinese leaves and sweetened with Jamaican sugar-all set on a
tablecloth made of Indian cotton. Oxford economist Kevin O'Rourke
and Harvard economist Jeff Williamson date the start of this process
to 182.0. In my 2006 paper, "Globalization: The Great Unbundling(s),"
I refer to this separation of production and consumption as global­
ization's first unbundling.
While shipping got cheaper, the costs of moving ideas and people
fdl much less. This unbalanced reduction of separation costs trig­
gered a chain of causes and effects that eventually produced enor­
i;nbus income differences between today's developed nations (called
the '�North" for short) and today's developing nations (the "South").
First, markets expanded globally but industry clustered locally. As
history would have it, industry clustered in the North. This Northern
industrialization fostered Northern innovation, and since ideas were
� so costly to move, Northern innovations stayed in the North. The
result was that modern, innovation-fueled growth took off sooner
and faster in the North. In just a few decades, the resulting growth
tlifferences compounded into the colossal, North-South income
asymmetries that define the planet's economic landscape even today.
In short, the Great Divergence was produced by the combination of
low trade costs and high communication costs.

0/obalization's Second Acceleration (the Second Unbundling)

Globalization accelerated again from around 1990, when the ICT
revolution radically lowered the cost of moving ideas. This launched
globalization's next phase-call it the "second unbundling" since it
involves the internatiohal separation of factories. Specifically, radi­
cally better communications made it possible to coordinate complex
activities at distance. Once this sort of offshoring was feasible, the
North-South wage gap that had arisen during the first unbundling
made it profitable.

INTRODUCTION 5
 The offshoring of production stages to low-wage nations changed
globalization, but not just because it shifted jobs overseas. To ensure
that the offshored stages meshed seamlessly with those left onshore,
rich-nation firms sent their marketing, managerial, and technical
know-how along with the production stages that had been moved
offshore. As a consequence, the second unbundling-some'times
called the "global value chain revolution"-redrew the international
boundaries of knowledge. The contours of industrial competitive­
ness are now increasingly defined by the outlines of international
production networks rather than the boundaries of nations.
A sports analogy helps explain how this could so thoroughly
transform globalization's impact. Imagine two soccer clubs sitting
down to discuss an exchange of players. If a �rade actually occurs,
both teams will gain. Each gets a player of a type they really needed
in exchange for a type of player they needed less.
Now consider a very different type of exchange. Suppose on the
weekends, the coach of the better team starts to train the worse
team. The outcome of this will surely make the league more com­
petitive overall and it will surely help the worse team. But it is not
at all sure that the best team will win from this exchange-even
though their coach will profit handsomely from being able to sell his
know-how to two teams instead of one.
The parallels with globalization are plain. The Old Globalization
can be thought of as swapping players. The New Globalization is
more like the cross-team training with the offshoring firms playing
the coach's role.
Putting it differently, ICT-enabled offshoring created a new style
of industrial competitiveness-one that combined G7 know-how
with developing-nation labor. Because this high-tech, low-wage
combination turned out to be a world beater, the easier movement
of ideas sparked massive North-to-South flows of know-how. It is
exactly these new knowledge flows that make the New Globaliza­
tion so different from the Old Globalization.

6 INTRODUCTION
Curiously Concentrated Effects and the Commodity Super-Cycle
Importantly, G7 firms own this know-how, so the new North-t.o­
South knowledge movements should not be thought of as some
enor�ous "Kumbaya moment." Rich nations are not sending their
!know-how to poor nations in a burst of caring and sharing. G7 firms
worlc hard to ensure that their offshored knowledge stays within the
confines of their production networks. According to the three­
cascading-constraints view, this is why the manufacturing miracle
happened in so few developing nations. To use the sports analogy,
the New Globalization only boosted the manufacturing fortunes
of the "teams"· that the G7 coach decided to "train." But why was the
tr�ining so curiously concentrated?
The answer,-in my view, turns on the cost of moving people, not
goods ·or ideas. Airplane fares have fallen, but the time-cost of travel
has continue� �o rise with the salaries of �anagers and technicians.
Since- it is still expensive to move people-and international produc­
tion networks still J?.eed people to move among facilities-offshoring
firins tend to cluster production in a few locations. Again to econo­
m.J�e
-· - on
- � the cost of moving people, these
,. .
locations tend to be ne�r the
G7 industrial powerhouses, especially Germany, Japan, and the
-l!rtited States. India is an exception, but mostly because India has en­
gaged in i�ternational production networks primarily via the types of
services for which frequ�nt face-to-face interaction is less of an issue.
While the second unbundling's impact on industrialization was
hyper--concentrated, the Great Convergence was a much broader
pheno111�non due to knock-on effects. About half of all humans live
in the developing nations that are rapidly industrializing, so their
rapid income growth created a booming demand for raw materials.
Booming demand, in turn, created the "commodity super-cycle,"
which subsequently sparked growth takeoffs in many c01nmodity­
exporting nations that were untouched by the emergence of global
value chains.

INTRODUCTION 7
Globalization's Next Big Thing: G/obalization's Third Unbundling
The three-cascading-constraints narrative-which is summarized
graphically in Figure 3-plainly admits the possibility of a third un­
bundling, if face-to-face costs plunge in the way coordination costs

FIGURE 3: Summary of the "three cascading constraints" view of globalization.

When horse carts and sailing ships were high-tech, goods, ideas, and people mostly
stayed put. For the vast majority of humanity, economic life was organized at the
village level (top panel).
Steamships and railroads radically lowered the cost of long-distance trade, al­
lowing production and consumption to separate in what could be called globaliza­
tion's first un�undling (middle panel). But relaxing the shipping constraint did not
make the world flat since the communication and face-to-face constraints were still
in evidence. Indeed, even as production moved away from consumption, manufac­
turing gathered into factories and industrial districts-not to economize on trade
costs, but rather to save on communication and face-to-face costs.
This microclustering spurred innovation in industrializing nations, and the in­
novations stayed local due to the high cost of moving ideas. The result was that
know-how-per-worker rose much faster in the North than it did in the South. Ulti­
mately, this is what created the great North-South income divide known as the
Great Divergence.
Globalization's second unbundling (bottom panel) became economical when rev­
olutionary advances in information and communication technology made it possible
to organize complex production processes even when they were separated internation­
ally. When this technical possibility became a reality, low wages in developing nations
enticed G7 firms to offshore some labor-intensive stages of production. Since the pro­
duction stages that were offshored still had to fit flawlessly with those left onshore, the
offshoring firms sent their know-how along with the jobs. In this way, the flows of
knowledge that used to happen only inside G7 factories became a key player in global­
ization (light bulbs in bottom panel).
These new information flows allowed a handful of developing nations to industri­
alize at a dizzying pace-resulting in a massive shift of industry from the North to the
South. This Southern industrialization-together with the commodity super-cycle it
launched-propelled emerging market income growth rates to unprecedented levels.
The result was the "shocking share shift" shown in Figure 1.
In a nutshell, this is how the ICT revolution transformed globalization and its
impact on the world economy; up to 1990, globalization was mostly about goods
crossing borders; now it is also about know-how crossing borders.

8 INTRODUCTION
1st UNBUNDLING
----

2nd UNBUNDLING

INTRODUCTION 9
have since the 1990s. Two technological developments might pro­
voke such a plunge. Really good substitutes for people crossing bor­
ders to share "brain services" is the first. Such technologies, known
as "telepresence," are not science fiction. They exist today but they
are expensive. The second would be the development of really good
substitutes for people traveling to provide manual services. This is
called "telerobotics" and it involves people in one place operating
robots that perform tasks in another place. Telerobotics exists, but it
is still expensive and the robots are not very flexible.
Taken together, these developments may dramatically change the
nature of globalization in coming decades. Both allow workers from
one nation to perform service tasks inside another nation without
actually being there. Such "virtual immigration," or international
telecommuting, would radically expand the range of jobs that are
directly subject to international competition. Many menial and
professional tasks in rich nations could be performed (remotely) by
workers and professionals sitting in poor nations. It would also
allow rich-nation professionals to apply their talents on a much
wider basis. For example, Japanese engineers could repair Japanese­
made capital equipment in South Africa by controlling sophisti­
cated robots from Tokyo. Some people would win from this new
competition I opportunity; others would have to find something
else to do.
Thus globalization's third unbundling is likely to involve workers
in one nation providing services in another nation-including ser­
vices that today require physical presence. Or to use the unbun­
dling theme, globalization's third unbundling is likely to allow labor
services to be physically unbundled from laborers.

What Is New about the New Globalization?

The changed nature of globalization also means that nations are af­
fected in many new ways. Six of them stand out.

IO INTRODUCTION
'Ihe New Globalization affects national economies with a finer
degree ofresolution.
Twentieth-century globalization produced greater national spe­
cialization at the level of sectors. Lower trade costs thus tended to
help or hurt whole sectors of the economy and the people working in
them. Twenty-first century globalization, by contrast, is not just
happening at the sector level; it is also happening at the level of pro­
duction stages and occupations. As a result, globalization's impact is
more unpredictable.
Under the Old Globalization, nations could identify their "sun­
rise" and "sunset" sectors. No longer. Now we have sunrise and sunset
stages and occupations in almost all sectors. As it turns out, one
cannot accurately predict which stages and jobs will be affected next
in a world where the contours of industrial competitiveness are de­
fined by offshoring firms.
·The New Globalization's impact is also more individual in the
sense that the winners and losers are no longer mostly grouped
by sectors and skill groups. Globa°lization's impact can vary across
workers who possess the same skill sets and work in the same sectors.
"Kaleidoscopic globalization" is how Columbia University econo­
mist Jagdish Bhagwati describes it. No matter what job you have and
no matter what sector you work in, you cannot really be sure that
your job won't be the next to suffer or benefit from globalization.
The finer degree of resolution also has important policy implica­
tions. Many nations have policies aimed at helping declining sectors
and disfavored skill groups, but globalization's finer resolution
means that such policies are insufficiently nuanced to distinguish
among today's winners and losers.
The New Globalization's impact is more sudden and more
uncontrollable.
The passage of time on the Old Globalization "clock" was marked
in years, since that is how long it took for tariff cuts and transporta­
tion improvements to take effect. The New Globalization, by contrast,

INTRODUCTION II
is more sudden due to the fact that it is driven by the doubling of
transmission, storage, and computing capacity every year or two. As
we have seen repeatedly in the last couple of decades, exponential
ICT improvements can turn implausible things into commonplace
things in a matter of months.
The technical nature of ICT also means that national govern­
ments have less control over the New Globalization. The laws of
physics make it easier to control the flow of goods than it is to con­
trol the flow of ideas. And politics reinforces the physics. The ideas
are, after all, flowing out of G7 nations whose voters have embraced
openness. Staunching the massive "knowledge �rbitrage" that is now
driving globalization would be next to impossible.
The New Globalization denationalized comparative advantage.
G7 firms are leveraging their firm-specific know-how by com­
bining it with labor in low-wage nations. With firms mixing and
matching different nations' sources of competitiveness, nations are
no longer the only natural unit of analysis. Increasingly, the bound­
aries of competitiveness are controlled by firms who run interna­
tional production networks.
To put it differently, the first unbundling was all about allowing
nations to better exploit their comparative advantages. The second
unbundiing is much more about allowing firms to boost their
competitiveness by recombining national sources of comparative ad­
vantage.
The New Globalization partly ruptured the compact between G7
workers and G7.firms.
When technology was national, international wage gaps adjusted
to international technology differences. For example, German wages
rose when German technology advanced. The second unbundling
partly disables this wage-technology equilibration process. The New
Globalization means that German workers are no longer the only
beneficiaries of German technological advances. Gennan firms can

I2 INTRODUCTION
now exploit improved German technology by combining it with, say,
Polish labor. Similar things could be said about firms and workers in
all the G7 nations.
The New Globalization changed the role ofdistance.
Standard thinking characterizes globalization as being mostly
about goods crossing borders. Doubling the distance between markets
is thus naturally thought to roughly double the trade costs. Applying
this log:ic today is a misthinkingnf twenty-first-century globalization
for a very simple reason.
· Cartographical distances affect the cost of moving goods, ideas,
and people in very different ways. With the Internet, the cost of
moving ideas is almost zero and varies little with distance. For people,
however, there is a big difference between destinations that can be
reached with a, day trip and those further out.
This may help explain why so few developing nations have been
able to industrialize rapidly, despite having adopted all the right
pro-business policies. To put it bluntly, they may simply be too far
from Detroit, Stuttgart, and Nagoya compared to other developing
nations.
The New Globalization should change how governments think about
their policies.
Vast swaths of economic policy are based on the notion that ,om­
petitiveness is a national feature. In rich nations, policies ranging
from education and training (preparing workers for the jobs of to­
morrow) to research and deyelopment tax breaks (developing the
products and processes of the future) are aimed at bolstering na­
tional sources of competitiveness. In developing nations, policies
ranging from tariff levels (protecting domestic production) to devel­
opment strategies (moving up the value chain) are founded on the
idea that the sources of national competitiveness are national.
All these policy presumptions need to be rethought in the light of
the New Globalization. For example, denationalized competitive

INTRODUCTION 13
advantage changed the options facing developing nations. Instead of
building the whole supply chain domestically to become competitive
internationally (the nineteenth- and twentieth-century way), devel­
oping nations now join international production arrangements to
become competitive and then industrialize by getting more good
jobs inside international value chains.
The flip side of this transfigured the competitiveness options
facing rich nations. Globally competitive firms knit together national
competitive advantages to make things in the most cost-effective lo­
cations. Firms and nations that eschew this new school of mix-and­
match competitive advantage struggle to compe_te with those that
have embraced it.
In short, the changed nature of globalization killed old-style de­
velopment policies just as it killed naively nationalistic industrial
policies in developed nations.

Roadmap for the Reader

The rest of this book is presented in five parts. The first takes a short
look at the long history of globalization using the concept of bun­
dling and unbundling as the organizing principle. This history is
covered in Chapters 1 through 3.
Part II, Extending the Globalization Narrative, comprises two
chapters. Chapter 4 presents the three-cascading-constraints view in
greater detail. Chapter s expands on what is really new about the New
Globalization.
Part III, Understanding Globalization's Changes, has two chap­
ters. Chapter 6 lays out the boot-camp economics of globalization,
and Chapter 7 then uses this information to make sense of why glo­
balization's impact changed so radically between the first and second
unbundling.
Part IV turns to the implications of the New Globalization for
policymaking. Specifically, Chapter 8 looks at what the changes

14 INTRODUCTION
mean for G7 globalization policies and Chapter 9 does the same for
developing nations.
Par t V, entitled Looking Ahead, does exactly that by presenting a
small number of conjectures about what the future holds for global­
ization and vice versa.

INTRODUCTION IS