Globalization and the Great Divergence Globalization and the Great Divergence Jeffrey G. Williamson...

Globalization and the Great Globalization and the Great DivergenceDivergence

Jeffrey G. WilliamsonJeffrey G. WilliamsonHarvard University and the University of Harvard University and the University of

WisconsinWisconsin

Inaugural LectureInaugural LectureUniversitat Pompeu FabraUniversitat Pompeu Fabra

October 8 2008October 8 2008

MotivationMotivation

In David Landes’ (1998) words, why is the In David Landes’ (1998) words, why is the Third World periphery in the South so poor, Third World periphery in the South so poor, and the industrial OECD core in the North so and the industrial OECD core in the North so rich?rich?

The competing explanations or The competing explanations or fundamentalsfundamentals::CultureCulture: Polyani 1944; Landes 1998; Clark : Polyani 1944; Landes 1998; Clark 20072007GeographyGeography: Diamond 1997; Sachs 2000, : Diamond 1997; Sachs 2000, 2001; Easterly & Levine 20032001; Easterly & Levine 2003

InstitutionsInstitutions: North & Weingast 1989; AJR : North & Weingast 1989; AJR 2001, 2002, 20052001, 2002, 2005

ProblemsProblems

Fundamentals don’t change very much Fundamentals don’t change very much over time. over time.

So, what explains the timing of the great So, what explains the timing of the great divergence between Core and divergence between Core and Periphery? Why did the gap open so fast Periphery? Why did the gap open so fast 1800-1913?1800-1913?

One possible explanation: the world was --One possible explanation: the world was --Closed and anti-global pre-1800Closed and anti-global pre-1800Open and pro-global 1800-1913Open and pro-global 1800-1913Closed and anti-global 1913-1950Closed and anti-global 1913-1950Open and pro-global 1950-2008Open and pro-global 1950-2008

Four Big FactsFour Big Facts

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

The rise of the North-South gapThe rise of the North-South gap

Rise in the Core-Periphery Income Per Capita Gap 1820-1998

0

2

4

6

8

10

12

14

1820 1870 1913 1950 1973 1998

WesternEurope/Africa

Western Europe/Asia

Western Europe/LatinAmerica

Parity

Source: Maddison (2001, Table B-21)

… … and extending backwards and extending backwards with real wageswith real wages

Table 1. The Great Divergence: Income Per Capita Gaps 1775-1913 1775 1820 1870 1913 Western Europe 100 100 100 100 Southern Europe 75.2 62.4 52.7 47.3 Eastern Europe 70.0 58.1 48.8 42.0 Latin America 75.2 55.3 37.9 40.9 Asia 56.4 42.6 27.5 20.0 Africa 46.1 34.8 22.7 15.5 Poor Periphery Average 64.6 50.6 37.9 33.1

Four Big FactsFour Big Facts Fact 1: Rise in the Core-Periphery Fact 1: Rise in the Core-Periphery

Income Per Income Per Capita Gap Capita Gap

Fact 2: De-Industrialization in the Fact 2: De-Industrialization in the Poor Periphery Poor Periphery

Do Industrial Countries Get Do Industrial Countries Get Richer?Richer?

Current GDP per capita 1820-1950 and Industrialization 50 or Current GDP per capita 1820-1950 and Industrialization 50 or 70 Years Before70 Years Before

Per Capita Levels of Per Capita Levels of

Industrialization 1750-1953Industrialization 1750-1953 1750 1800 1860 1913 1953

European Core 8 8 17 45 90

Asian and Latin American Periphery 7 6 4 2 5

Ratio Core/Periphery 1.1 1.3 4.3 22.5 18

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.

More de-industrialization More de-industrialization figuresfigures TextilesTextiles

Percent of Home Market Supplied byPercent of Home Market Supplied by

Imports Domestic Imports Domestic IndustryIndustry

India 1833India 1833 5 5 9595

India 1887India 1887 58-65 58-65 35-42 35-42

Ottoman 1820sOttoman 1820s 3 3 9797

Ottoman 1870sOttoman 1870s 62-89 62-89 11-38 11-38

Mexico 1800sMexico 1800s 25 25 75 75

Mexico 1879Mexico 1879 40 40 6060

Four possible causes of de-Four possible causes of de-industrialization industrialization

in the Poor Peripheryin the Poor Periphery● ● World market integration (e.g. globalization) World market integration (e.g. globalization) induces greater specialization (e.g. a new economicinduces greater specialization (e.g. a new economicorder); implies tot improvement for peripheryorder); 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



Fact 2: De-Industrialization in the Fact 2: De-Industrialization in the Poor Poor Periphery Periphery

Fact 3: Secular Terms of Trade Boom and Bust in the Periphery

The 18The 18thth c calm before the c calm before the storm …storm …

The 19The 19thth c storm … c storm …

Some more than othersSome more than othersFigure 4. The Poor Periphery: Net Barter Terms of Trade 1796-1913

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50

100

150

200

250

1796 1802 1808 1814 1820 1826 1832 1838 1844 1850 1856 1862 1868 1874 1880 1886 1892 1898 1904 1910

Ter

ms

of T

rad

e

Middle East

Latin America

Southeast Asia

European Periphery

South Asia

And the terms of trade And the terms of trade bust, as seen from Latin bust, as seen from Latin

America 1811-1939America 1811-1939Figure 1Latin American Terms of Trade 1811-1939

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1815

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1823

1827

1831

1835

1839

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1851

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1859

1863

1867

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1907

1911

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1919

1923

1927

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1935

1939

Year

Px/

Pm

Average LA TOT Unadjusted

Average LA TOT Adjusted

Source: Unadjusted- - Clingingsmith and Williamson (2004), Figure 9, based on data in Coatsworth and Williamson (2004a); Adjusted- - see Appendix 1.

What caused the 120-year What caused the 120-year secular boom-bust in terms of secular boom-bust in terms of

trade for primary-product trade for primary-product producers?producers?

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

FirstFirst

The 19The 19thth Century Transport Revolution Century Transport Revolution

on Sea Laneson Sea Lanes

And then a slow approach to steady state …

Figure 2.2: Real Global Freight Rate Index(1869-1997) (1884=1.00)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1870

-1874

1875

-1879

1880

-1884

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-1889

1890

-1894

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1900

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-1914

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-1924

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-1929

1930

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-1939

1940

-1944

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-1949

1950

-1954

1955

-1959

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-1964

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-1969

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-1974

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-1984

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-1989

1990

-1994

SecondSecond

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

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

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

ThirdThird

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



Fact 2: De-Industrialization in the Fact 2: De-Industrialization in the Poor Poor Periphery Periphery

Fact 3: Secular Terms of Trade Boom and Bust in the Periphery

Fact 4: Terms of Trade Volatility Much Bigger

in the Periphery

Core vs Poor PeripheryRegion Before 1820 1820-1870 1870-1913

United Kingdom 11.985 2.910 2.006Average Periphery 6.460 9.176 7.089

European Periphery 4.036 10.720 7.058Italy 0.922 19.003 11.214Russia 3.226 10.722 6.104Spain 7.959 6.472 6.023

Latin America 3.728 6.429 8.140Argentina 4.409 6.961 8.303Brazil N/A 2.174 10.283Mexico 1.658 5.531 5.379

Middle East 2.902 13.611 7.316Egypt 2.982 17.861 11.760Ottoman Turkey 2.821 6.549 3.289

South Asia 11.876 9.628 5.364Ceylon 17.860 7.590 7.532India 5.891 11.666 3.196

Southeast Asia 7.788 6.977 7.303Philippines 7.992 9.778 6.603Siam 7.583 7.951 6.732

East Asia 15.554 10.527 4.952China 15.554 19.752 4.311Japan N/A 1.302 5.592

Table 3. Terms of Trade Volatility 1782-1913

Four Big FactsFour Big Facts Fact 1: Rise in the Core-Periphery Fact 1: Rise in the Core-Periphery

Income Per Income Per Capita Gap Capita Gap

Fact 2: De-Industrialization in the Fact 2: De-Industrialization in the Poor Poor Periphery Periphery Fact 3: Secular Terms of Trade Boom and Bust

in the Periphery Fact 4: Terms of Trade Volatility Much Bigger

in the Periphery

One Big Question

Are the correlations spurious

or are they causal?So, what about the

theory, and what about the

magnitudes?

What’s the Impact of a What’s the Impact of a Secular Secular ImprovementImprovement in the Terms of Trade for in the Terms of Trade for

a a Primary ProductPrimary Product Exporter? Exporter?

Short Run: unambiguous income increaseMedium Run: unambiguous income increase via resource allocation and specialization response, e.g. de-industrializationLong Run: ambiguous impact on growth due to de-industrialization and the belief that industry is a carrier of modern economic growthNet Impact: theory ambiguous, history must resolve the issue

What’s the Impact of a What’s the Impact of a Secular Secular ImprovementImprovement in the Terms of Trade for in the Terms of Trade for

an Exporter of an Exporter of ManufacturersManufacturers??

Short Run:Short Run: unambiguous income increase unambiguous income increase

Medium Run: unambiguous income increase via resource allocation and specialization response, e.g. more industrializationLong 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 …

What Should We Find in History?

Asymmetric impact of secular terms of trade

improvement Core versus Periphery!

What’s the Impact of Terms of What’s the Impact of Terms of Trade Trade VolatilityVolatility on the Exporter of on the Exporter of

ManufacturesManufactures in the Rich Core? in the Rich Core?

Exporters of manufactures in the rich core Exporters of manufactures in the rich core can can

insure against price volatility cheaply insure against price volatility cheaply sincesince: :

● ● they face well developed capital markets;they face well developed capital markets; ● ● governments have varied revenue governments have varied revenue

sources;sources; ● ● rich families can consumption smooth;rich families can consumption smooth; ● ● they export many products, spreading they export many products, spreading

risk;risk; ● ● theirtheir export prices are less volatile.export prices are less volatile.

What’s the Impact of Terms of What’s the Impact of Terms of Trade Trade VolatilityVolatility on the on the Primary Primary ProductProduct Exporter in the Poor Exporter in the Poor

Periphery?Periphery?

Poor primary product exporters cannot Poor primary product exporters cannot insureinsure

against price volatility cheaply sinceagainst price volatility cheaply since: :

● ● they face undeveloped capital markets;they face undeveloped capital markets; ● ● governments rely very heavily on import governments rely very heavily on import duties and export taxes;duties and export taxes; ● ● poor families cannot consumption smooth;poor families cannot consumption smooth; ● ● they export few products, so more vulnerable they export few products, so more vulnerable

to to price shocks;price shocks;

● ● their export prices are more volatile.their export prices are more volatile.

And risk-aversion begats lower And risk-aversion begats lower accumulation!accumulation!

So ….So ….

What Should We Find In What Should We Find In History?History?

Asymmetric impact Asymmetric impact

of terms of trade volatilityof terms of trade volatility

Core versus Periphery!Core versus Periphery!

Identification Assumptions: Two Identification Assumptions: Two ConcernsConcerns

FirstFirst

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.

SecondSecond

Did some fundamental – institutions, Did some fundamental – institutions, geography or culture -- drive both the choice geography or culture -- drive both the choice of export product and growth? Maybe, but so of export product and growth? Maybe, but so what?what?

● ● captured by country fixed effects, since captured by country fixed effects, since export export

“ “choice” was made long before 1870 and choice” was made long before 1870 and persisted persisted

until 1939until 1939

● ● anyway, no correlation between price anyway, no correlation between price volatility and volatility and

institutional qualityinstitutional quality

A new historical database, annual, A new historical database, annual, 35 countries, 1870-193935 countries, 1870-1939

6 Core industrial leaders6 Core industrial leaders: AH, Fr, Ger, It, UK, USA: AH, Fr, Ger, It, UK, USA

8 European Periphery: Den, Grc, Nor, Port, Serb, Sp, Swe, Rus8 Latin American Periphery: Arg, Brz, Col, Ch,

Cuba, Mex, Per, Ur10 Asia-MidEast: Bur, Cey, Egy, Ind, Indo, Jap, Phil, Siam, Turk3 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.

PeripheryPeriphery CoreCore

TOT GrowthTOT Growth 0.050.05 0.630.63

[0.119][0.119] [0.251]**[0.251]**

TOT VolatilityTOT Volatility -0.08-0.08 0.020.02

[0.033]**[0.033]** [0.058][0.058]

ObservationsObservations 167167 3232

R-squaredR-squared 0.350.35 0.740.74

Decade DummiesDecade Dummies YesYes YesYes

Country DummiesCountry Dummies YesYes YesYes

ControlsControls YesYes YesYes

Summary StatisticsSummary Statistics::

GDP GrowthGDP Growth 1.051.05

[1.66][1.66]1.591.59

[1.28][1.28]

TOT GrowthTOT Growth -0.28-0.28 0.30.3

[1.46][1.46] [1.02][1.02]

TOT VolatilityTOT Volatility 8.88.8 6.826.82

[5.17][5.17] [4.86][4.86]

Impact on GrowthImpact on Growth::



Growth and the Terms of Trade 1870-1939 (Dependent variable: Decadal average GDP per capita growth)

Robust standard errors in brackets ** significant at 5%

PeripheryPeriphery CoreCore


[0.119][0.119] [0.251]**[0.251]**


[0.033]**[0.033]** [0.058][0.058]

ObservationsObservations 167167 3232

R-squaredR-squared 0.350.35 0.740.74

Decade DummiesDecade Dummies YesYes YesYes

Country DummiesCountry Dummies YesYes YesYes

ControlsControls YesYes YesYes

Summary StatisticsSummary Statistics::

GDP GrowthGDP Growth 1.051.05

[1.66][1.66]1.591.59

[1.28][1.28]

TOT GrowthTOT Growth -0.28-0.28 0.30.3

[1.46][1.46] [1.02][1.02]

TOT VolatilityTOT Volatility 8.88.8 6.826.82

[5.17][5.17] [4.86][4.86]

Impact on GrowthImpact on Growth::



Growth and the Terms of Trade 1870-1939 (Dependent variable: Decadal average GDP per capita growth)

Robust standard errors in brackets** significant at 5%

Note:Percentage point impact of 1 st. dev.change

What About pre-1870 What About pre-1870 History?History?

The data aren’t sufficient to The data aren’t sufficient to estimate impact as we did for estimate impact as we did for 1870-1938.1870-1938.

But But terms of trade volatility was terms of trade volatility was even bigger pre-1870even bigger pre-1870 than post- than post-1870, 1870, so bigger negative impact so bigger negative impact on growthon growth if the post-1870 if the post-1870 impact conditions also held for impact conditions also held for the pre-1870 period.the pre-1870 period.

Core vs Poor PeripheryRegion Before 1820 1820-1870 1870-1913

United Kingdom 11.985 2.910 2.006Average Periphery 6.460 9.176 7.089

European Periphery 4.036 10.720 7.058Italy 0.922 19.003 11.214Russia 3.226 10.722 6.104Spain 7.959 6.472 6.023

Latin America 3.728 6.429 8.140Argentina 4.409 6.961 8.303Brazil N/A 2.174 10.283Mexico 1.658 5.531 5.379

Middle East 2.902 13.611 7.316Egypt 2.982 17.861 11.760Ottoman Turkey 2.821 6.549 3.289

South Asia 11.876 9.628 5.364Ceylon 17.860 7.590 7.532India 5.891 11.666 3.196

Southeast Asia 7.788 6.977 7.303Philippines 7.992 9.778 6.603Siam 7.583 7.951 6.732

East Asia 15.554 10.527 4.952China 15.554 19.752 4.311Japan N/A 1.302 5.592

Table 3. Terms of Trade Volatility 1782-1913

What About pre-1870 What About pre-1870 History?History?

The data aren’t sufficient to estimate impact The data aren’t sufficient to estimate impact as we did for 1870-1938.as we did for 1870-1938.

But But terms of trade volatility was even bigger terms of trade volatility was even bigger pre-1870pre-1870 than post-1870, so bigger than post-1870, so bigger negative impact on growth if the post-1870 negative impact on growth if the post-1870 impact conditions also held for the pre-impact conditions also held for the pre-1870 period.1870 period.

In addition, the In addition, the de-industrialization de-industrialization conditions were much greater pre-1870conditions were much greater pre-1870 during terms of trade boom then during during terms of trade boom then during post-1870 terms of trade bust, post-1870 terms of trade bust, implying implying even greater negative impact on growtheven greater negative impact on growth before 1870 than after.before 1870 than after.

Reminder: Terms of trade Reminder: Terms of trade boom versus bust (in Latin boom versus bust (in Latin

America)America)Figure 1Latin American Terms of Trade 1811-1939

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1811

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Px/

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Average LA TOT Unadjusted

Average LA TOT Adjusted

Source: Unadjusted- - Clingingsmith and Williamson (2004), Figure 9, based on data in Coatsworth and Williamson (2004a); Adjusted- - see Appendix 1.

Bottom LinesBottom Lines

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

Lessons of History?Lessons of History?

Would we expect the same today after five Would we expect the same today after five decades (1950-2008) in to the second global decades (1950-2008) in to the second global century? century?

No! The effect has almost certainly vanished No! The effect has almost certainly vanished today since the old economic order has also today since the old economic order has also vanished everywhere in the poor periphery vanished everywhere in the poor periphery except Africa, where it is vanishing.except Africa, where it is vanishing.

Many thanks!Many thanks!

Globalization and the Great Divergence Globalization and the Great Divergence Jeffrey G. Williamson...

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