Ben Bernanke is Chairman of the Federal Reserve, the quasi-governmental central banking system here in the United States, which has tremendous influence over the monetary and credit conditions in the economy. In a recent speech, he talked about global economic integration.

As Bernanke spelled out, when economists measure the earth in “distance”, they’re referring not just to the physical distance, but to other factors as well. Things like the cost of shipping goods, the time it takes for a message to travel, and the cost of sending and receiving that message are all important. They also factor in what they call the “width of the border”, which are the costs associated with tariffs and other rules imposed at a border, as well as costs that arise from differences in language, culture, legal traditions, and political systems.

In today’s world, these distances are shrinking rapidly.

One of the defining characteristics of the world in which we now live is that, by most economically relevant measures, distances are shrinking rapidly. The shrinking globe has been a major source of the powerful wave of worldwide economic integration and increased economic interdependence that we are currently experiencing.

He provides a brief but concise history of global integration, from the unification of the Roman empire, to the voyage of Columbus, to both World Wars. He draws several conclusions from his historical review.

Technology is a critical factor, and the rate of progress is itself buoyed by the economic incentives of a global economy.

Perhaps the clearest conclusion is that new technologies that reduce the costs of transportation and communication have been a major factor supporting global economic integration. Of course, technological advance is itself affected by the economic incentives for inventive activity; these incentives increase with the size of the market, creating something of a virtuous circle.

The choices and national policies of the individual players have a critical impact.

[N]ational policy choices may be critical determinants of the extent of international economic integration. […] [D]ifferent choices by political leaders might have led to very different historical outcomes.

Societies are severely impacted when economies become more open, often leading to resistance.

[S]ocial dislocation, and consequently often social resistance, may result when economies become more open. […] [I]ncreased economic interdependence may also engender opposition by stimulating social or cultural change, or by being perceived as benefiting some groups much more than others.

Bernanke goes on to talk about where we are now, saying that in many ways the same basic forces are driving the economic changes we see today.

Technology continues to play an important role.

[D]ramatic improvements in supply-chain management, made possible by advances in communication and computer technologies, have significantly reduced the costs of coordinating production among globally distributed suppliers.

The range of products we trade continues to expand, with the service sector in particular seeing much expansion.

Particularly striking […] is the extent to which information and communication technologies now facilitate active international trade in a wide range of services, from call center operations to sophisticated financial, legal, medical, and engineering services.

National policy also continues to play an important role.

[The] role of government policy in supporting, or at least permitting, global economic [is critical]. [T]he institutional framework supporting global trade […] has expanded and strengthened over time. Regional frameworks and agreements […] have also promoted trade. Government restrictions on international capital flows have generally declined, and the “soft infrastructure” supporting those flows […] have improved, in part through international cooperation.

Resistance to global economic integration continues to emerge.

[S]ocial and political opposition to rapid economic integration has also emerged. […] [O]ther concerns have been expressed as well—for example, about the effects of global economic integration on the environment or on the poorest countries.

Yet, much is new about the global economic integration we’re seeing today, Bernanke adds.

First, the current rate of growth is unprecedented. Data on exports and financial flows say alot, but the real story is about how more people are engaged.

The emergence of China, India, and the former communist-bloc countries implies that the greater part of the earth’s population is now engaged, at least potentially, in the global economy. There are no historical antecedents for this development.

Second, traditional economic flows are meaning less.

[T]he traditional distinction[s] [are] becoming increasingly less relevant, as the mature industrial economies and the emerging-market economies become more integrated and interdependent.

Third, we’re seeing unprecedented geographically distributed production.

[P]roduction processes are becoming geographically fragmented to an unprecedented degree. Rather than producing goods in a single process in a single location, firms are increasingly breaking the production process into discrete steps and performing each step in whatever location allows them to minimize costs. […] [E]mpirical evidence […] suggests that substantial productivity gains can often be achieved through the development of global supply chains.

Finally, capital markets have matured, with capital flowing more freely, largely thanks to technology.

[G]ross flows today are much larger. […] [C]apital flows now take many more forms than in the past. […] Flows of foreign direct investment are also much larger relative to output than they were fifty or a hundred years ago. [T]he increase in capital flows owes much to capital-market liberalization and factors such as the greater standardization of accounting practices as well as to technological advances.

Bernanke begins his conclusion touting the merits of global economic integration…

Economic and technological changes are likely to shrink effective distances still further in coming years, creating the potential for continued improvements in productivity and living standards and for a reduction in global poverty.

…and he highlights some of the struggles we’ll continue to face, like opposition in the form of terrorism, and worker dislocation.

Geopolitical concerns, including international tensions and the risks of terrorism, already constrain the pace of worldwide economic integration and may do so even more in the future. […] [T]he social and political opposition to openness can be strong. [M]uch of it arises because changes in the patterns of production are likely to threaten the livelihoods of some workers and the profits of some firms, even when these changes lead to greater productivity and output overall.

The natural reaction of many affected by this integration is to resist change, he says, and he warns of protectionist measures.

The challenge for policymakers is to ensure that the benefits of global economic integration are sufficiently widely shared […] that a consensus for welfare-enhancing change can be obtained.

Bernanke admits it’ll be far from easy.

However, the effort is well worth making, as the potential benefits of increased global economic integration are large indeed.

My thoughts? All together, a great speech, and I feel that Mr. Bernanke demonstrated he understands the “big picture” — probably a good thing, given the influence he has in his position. He correctly highlighted the vital role that technology plays as our world is increasingly connected and integrated. I was very happy to see that he understood the remarkable changes this level of integration is having on (and indeed demanding of) business and production. Technology and its relation to geographically distributed work is of course our focus here at Woven. I believe he was correct in correlating the terrorism we’re seeing around the world to the forces opposing rapid global integration.

It’s a crazy world indeed, with unprecedented change, and opposing views on where it’s all headed (or should be headed).

Stay with us as we continue to explore. Subscribe to our syndication feed using the buttons on the right of this page.