How did declining transportation costs impact the world economy in the late 19th and early 20th centuries
The biggest obstacles to economic growth are trade costs and transportation costs are part of trade costs. Transportation costs determine the level and path of the trade (Torelli, 2013). Low transportation costs during the late 19th and early 20th century indeed were key drivers of global economic growth. These innovations in maritime shipping and the overall distribution of railroad changed the effect of geography on trade costs, which in turn reduced the effect of distance as a trade barrier and significantly contributed to increased trade and economic growth. The extension of the telegraph and railroad networks promoted domestic economic integration besides contributing to easy movement of raw materials, labor, fuel and goods to and from different locations. Railroads and steamships also created global markets for commodities such as wool and wheat.
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Today's financial global system has not rid itself of fragile features. Why do we believe that is true? Why have we not found more financial stability in our systems?
The existing global financial system has not rid itself of fragile features because of the structural issues in the long-term debt cycle and differential productivity (Torelli, 2013). These factors make the world financial system to be more fragile. Regarding productivity, the world is experiencing economic power shifts, increasing inequality, reduced manufacturing employment, an emerging digital economy, and the global saving excesses of the previous decade (Torelli, 2013). These structural changes create significant political effects such as an increase in populism and nationalism, a trade war between key world economies, destruction of the liberal global economic system, and Brexit. The long-standing credit cycle ended in the 2007-2008 financial crisis. China accelerated its credit cycle after the crisis and is now nearing the debt accumulation limits. These long term situations demonstrate the limitations that the world faces in its response if a recession emerges now.
It is also very challenging for the world today to develop a coordinated and appropriate reaction to any serious global financial crisis. Additionally, a fragmented global political system creates financial disruptions through trade collapse caused by a geopolitical situation. The existing policy and political instability together with the lack of safe credit expansion opportunities make it challenging for the world to deal with any financial crisis, even if the crisis is short term.
We have not found more financial stability in our system because these sources of fragility are entrenched deeply in the system and the recent political developments are likely to worsen them.
References
Torelli, P. (2013). A Brief History of Modern Economic Globalization . Harvard Business Publishing.
