Globalization and the Great Divergence

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Globalization and the Great Divergence
Inaugural Lecture Universitat Pompeu
Fabra October 8 2008

• Jeffrey G. WilliamsonHarvard University and the
  University of Wisconsin

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Motivation

• In David Landes (1998) words, why is the Third
  World periphery in the South so poor, and the
  industrial OECD core in the North so rich?
• The competing explanations or fundamentals
• Culture Polyani 1944 Landes 1998 Clark 2007
• Geography Diamond 1997 Sachs 2000, 2001
  Easterly Levine 2003
• Institutions North Weingast 1989 AJR 2001,
  2002, 2005

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Problems

• Fundamentals dont change very much over time.
• So, what explains the timing of the great
  divergence between Core and Periphery? Why did
  the gap open so fast 1800-1913?
• One possible explanation the world was --
• Closed and anti-global pre-1800
• Open and pro-global 1800-1913
• Closed and anti-global 1913-1950
• Open and pro-global 1950-2008

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Four Big Facts

• Fact 1 Rise in the Core-Periphery Income Per
  Capita Gap

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The rise of the North-South gap
Source Maddison (2001, Table B-21)
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and extending backwards with real wages
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Four Big Facts

• Fact 1 Rise in the Core-Periphery Income
  Per Capita Gap

Fact 2 De-Industrialization in the Poor
Periphery
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Do Industrial Countries Get Richer?
Current GDP per capita 1820-1950 and
Industrialization 50 or 70 Years Before
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Per Capita Levels of Industrialization 1750-1953
Source Bairoch (1982, Table 4, p. 281). The
European core contains Austria-Hungary, Belgium,
France, Germany, Italy, Russia, Spain, Sweden,
Switzerland, United Kingdom. The Asian and Latin
American periphery contains China, India (plus
Pakistan in 1953), Brazil and Mexico.
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More de-industrialization figures

• Textiles
• Percent of Home Market Supplied by
• Imports Domestic Industry
• India 1833 5 95
• India 1887 58-65 35-42
• Ottoman 1820s 3 97
• Ottoman 1870s 62-89 11-38
• Mexico 1800s 25 75
• Mexico 1879 40 60

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Four possible causes of de-industrialization in
the Poor Periphery

• ? World market integration (e.g. globalization)
• induces greater specialization (e.g. a new
  economic
• order) implies tot improvement for periphery

? Rapid industrial productivity growth in Europe
implies tot improvement for periphery
? Deterioration in industrial productivity and
competitiveness in periphery implies no
tot improvement for periphery
? Improved productivity in primary product export
sector in periphery implies no tot improvement
for periphery
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Four Big Facts

• Fact 1 Rise in the Core-Periphery Income
  Per Capita Gap

Fact 2 De-Industrialization in the Poor
Periphery
Fact 3 Secular Terms of Trade Boom and Bust
in the Periphery
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The 18th c calm before the storm
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The 19th c storm
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Some more than others
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And the terms of trade bust, as seen from Latin
America 1811-1939
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What caused the 120-year secular boom-bust in
terms of trade for primary-product producers?

• First

• World market integration generated by a
  world-wide transport revolution caused CPC,
  lowered Pm and raised Px. Very fast initially,
  then a slow-down to steady state.

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The 19th Century Transport Revolution on Sea
Lanes
And then a slow approach to steady state
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Second

• Diffusion of the industrial revolution in core
  raised GDP growth rates there, and thus in the
  derived demand for luxury foodstuffs.

Growth rates of manufacturing were even greater
in core since its share in GDP was rising, and
thus so too was derived demand for primary
product intermediates.

• Manufacturing growth slowed down in core as
  industrial transition was completed there, and
  thus so too did the derived demand for primary
  product intermediates.

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Third

• Manufacturing searched for new technologies
  and synthetic products to save on or even replace
  the increasingly expensive primary products. It
  finally found them adding further to the
  demand-led terms of trade bust.

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Four Big Facts

• Fact 1 Rise in the Core-Periphery Income
  Per Capita Gap

Fact 2 De-Industrialization in the Poor
Periphery
Fact 3 Secular Terms of Trade Boom and Bust
in the Periphery
Fact 4 Terms of Trade Volatility Much
Bigger in the Periphery
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Four Big Facts

• Fact 1 Rise in the Core-Periphery Income
  Per Capita Gap

Fact 2 De-Industrialization in the Poor
Periphery
Fact 3 Secular Terms of Trade Boom and Bust
in the Periphery
Fact 4 Terms of Trade Volatility Much
Bigger in the Periphery
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One Big Question

• Are the correlations spurious
• or are they causal?

So, what about the theory, and what about the
magnitudes?
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Whats the Impact of a Secular Improvement in the
Terms of Trade for a Primary Product Exporter?
Short Run unambiguous income increase
Medium Run unambiguous income increase via
resource allocation and specialization response,
e.g. de-industrialization
Long Run ambiguous impact on growth due to
de-industrialization and the belief that industry
is a carrier of modern economic growth
Net Impact theory ambiguous, history must
resolve the issue
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Whats the Impact of a Secular Improvement in the
Terms of Trade for an Exporter of Manufacturers?

• Short Run unambiguous income increase

Medium Run unambiguous income increase via
resource allocation and specialization response,
e.g. more industrialization
Long Run unambiguous impact on growth due to
industrialization and the belief that industry is
a carrier of modern economic growth
Net Impact theory unambiguous
So
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• What Should We Find in History?

Asymmetric impact of secular terms of trade
improvement Core versus Periphery!
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Whats the Impact of Terms of Trade Volatility on
the Exporter of Manufactures in the Rich Core?

• Exporters of manufactures in the rich core can
• insure against price volatility cheaply since
• ? they face well developed capital markets
• ? governments have varied revenue sources
• ? rich families can consumption smooth
• ? they export many products, spreading
  risk
• ? their export prices are less volatile.

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Whats the Impact of Terms of Trade Volatility on
the Primary Product Exporter in the Poor
Periphery?

• Poor primary product exporters cannot insure
• against price volatility cheaply since
• ? they face undeveloped capital markets
• ? governments rely very heavily on import
  
• duties and export taxes
• ? poor families cannot consumption smooth
• ? they export few products, so more
  vulnerable to
• price shocks
• ? their export prices are more volatile.

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• And risk-aversion begats lower accumulation!
• So .

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• What Should We Find In History?
• Asymmetric impact
• of terms of trade volatility
• Core versus Periphery!

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Identification Assumptions Two Concerns

• First

Was the terms of trade exogenous everywhere in
the periphery? Was every poor country a price
taker? No, but results are robust to exclusion of
suspected price-makers e.g. ? remove any with
33 of world exports of any commodity
Australia, Brazil, Chile, China, India,
Philippines, Russia same result ? plus, remove
any with 25 of world exports of any
commodity Argentina, Canada, Japan same
result.
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Second

• Did some fundamental institutions, geography
  or culture -- drive both the choice of export
  product and growth? Maybe, but so what?
• ? captured by country fixed effects, since
  export
• choice was made long before 1870 and
  persisted
• until 1939
• ? anyway, no correlation between price
  volatility and
• institutional quality

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A new historical database, annual, 35 countries,
1870-1939

• 6 Core industrial leaders AH, Fr, Ger, It, UK,
  USA

8 European Periphery Den, Grc, Nor, Port, Serb,
Sp, Swe, Rus
8 Latin American Periphery Arg, Brz, Col, Ch,
Cuba, Mex, Per, Ur
10 Asia-MidEast Bur, Cey, Egy, Ind, Indo, Jap,
Phil, Siam, Turk
3 English-speaking European Offshoots Aus, Can,
NZ
Covers more than 85 of world population and more
than 95 of world GDP in 1914.
Results are insensitive to alternative Core
versus Periphery allocations.
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Growth and the Terms of Trade 1870-1939
(Dependent variable Decadal average GDP per
capita growth)
Robust standard errors in brackets
significant at 5
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Growth and the Terms of Trade 1870-1939
(Dependent variable Decadal average GDP per
capita growth)
Robust standard errors in brackets
significant at 5
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Growth and the Terms of Trade 1870-1939
(Dependent variable Decadal average GDP per
capita growth)
Robust standard errors in brackets
significant at 5
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Growth and the Terms of Trade 1870-1939
(Dependent variable Decadal average GDP per
capita growth)
Robust standard errors in brackets
significant at 5
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Growth and the Terms of Trade 1870-1939
(Dependent variable Decadal average GDP per
capita growth)
Note Percentage point impact of 1 st.
dev. change
Robust standard errors in brackets significant
at 5
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What About pre-1870 History?

• The data arent sufficient to estimate impact as
  we did for 1870-1938.
• But terms of trade volatility was even bigger
  pre-1870 than post-1870, so bigger negative
  impact on growth if the post-1870 impact
  conditions also held for the pre-1870 period.

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What About pre-1870 History?

• The data arent sufficient to estimate impact as
  we did for 1870-1938.
• But terms of trade volatility was even bigger
  pre-1870 than post-1870, so bigger negative
  impact on growth if the post-1870 impact
  conditions also held for the pre-1870 period.
• In addition, the de-industrialization conditions
  were much greater pre-1870 during terms of trade
  boom then during post-1870 terms of trade bust,
  implying even greater negative impact on growth
  before 1870 than after.

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Reminder Terms of trade boom versus bust (in
Latin America)
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Bottom Lines

• ? Did globalization experience contribute to the
  Great
• Divergence before 1940? Absolutely!

? How much of the gap in growth rates between
core and periphery 1870-1940 was
explained by different tot growth and volatility
impact? Big a third to a half.
? Would we expect the same tot impact pre-1870?
Bigger secular tot boom, not bust, and tot
volatility at least as big.
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Lessons of History?

• Would we expect the same today after five
  decades (1950-2008) in to the second global
  century?
• No! The effect has almost certainly vanished
  today since the old economic order has also
  vanished everywhere in the poor periphery except
  Africa, where it is vanishing.

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• Many thanks!