Transcript Copenhagen Economics Institute Short Course March 5

Copenhagen Economics Institute
Short Course
March 5-7 2007
Globalization in the Very Long Run
Jeffrey G. Williamson
Harvard University
Carlos III de Madrid (visiting Spring)
[email protected]
Monday Morning March 5
• 9:30-10:30 Trade and Globalization since 1492
• 10:30-11:00 Coffee/Tea break
• 11:00-12:00 Distribution and Growth Impact
Monday Afternoon March 5
• 14:00-16:00 Williamson Office Hours
• (Note change: The original “Global Capital Markets” 14:00-15:00
hour will not be offered.)
• 18:00
Course Dinner
Tuesday Morning March 6
• 9:30-10:30 The Determinants of Mass Migration
• 10:30-11:00 Coffee/Tea break
• 11:00-12:00 The Impact of Mass Migration
Tuesday Afternoon March 6
• 13:00-14:00 Institute Seminar “Globalization, De-Industrialization
and Divergence: Third World before the Modern Era”
• 15:00-16:30 Williamson Office Hours
Wednesday Morning March 7
• 9:30-10:30 The Political Economy of Protection
• 10:30-11:00 Coffee/Tea break
• 11:00-12:00 The Political Economy of Immigration
Recommended Course Readings:
M. Bordo, A. M. Taylor and J. G. Williamson (eds.), Globalization in Historical
Perspective (Chicago and NBER 2003). Paperback 2006.
K. H. O’Rourke and J. G. Williamson, Globalization and History: The Evolution
of a 19th Century Atlantic Economy (MIT 1999). Paperback 2000.
T. J. Hatton and J. G. Williamson, Global Migration and the World Economy:
Two Centuries of Policy and Performance (MIT 2005).
M. Obstfeld and A. M. Taylor, Global Capital Markets: Integration, Crisis, and
Growth (Cambridge 2004). Paperback 2005.
K. H. O’Rourke and R. Findlay, Power and Plenty: Trade, War and the World
Economy 1000-2000 (forthcoming), Chps. 6-10.
J. G. Williamson, Globalization and the Poor Periphery before the 1950: The
Ohlin Lectures (MIT 2006).
Other Readings of Interest:
J. Inikori, Africans and the Industrial Revolution in England (Cambridge 2002).
Also in paperback.
R. Rogowski, Commerce and Coalitions (Princeton 1989). Also in paperback.
W. Lewis, The Evolution of the International Economic Order (Princeton: 1978).
D. A. Irwin, Against the Tide: An Intellectual History of Free Trade (Princeton
1996). Also in paperback.
Recommended Course Readings:
M. Bordo, A. M. Taylor and J. G. Williamson (eds.), Globalization in Historical
Perspective (Chicago and NBER 2003). Paperback 2006.
K. H. O’Rourke and J. G. Williamson, Globalization and History: The Evolution
of a 19th Century Atlantic Economy (MIT 1999). Paperback 2000.
T. J. Hatton and J. G. Williamson, Global Migration and the World Economy:
Two Centuries of Policy and Performance (MIT 2005).
M. Obstfeld and A. M. Taylor, Global Capital Markets: Integration, Crisis, and
Growth (Cambridge 2004). Paperback 2005.
K. H. O’Rourke and R. Findlay, Power and Plenty: Trade, War and the World
Economy 1000-2000 (forthcoming), Chps. 6-10.
J. G. Williamson, Globalization and the Poor Periphery before the 1950: The
Ohlin Lectures (MIT 2006).
Other Readings of Interest:
J. Inikori, Africans and the Industrial Revolution in England (Cambridge 2002).
Also in paperback.
R. Rogowski, Commerce and Coalitions (Princeton 1989). Also in paperback.
W. Lewis, The Evolution of the International Economic Order (Princeton: 1978).
D. A. Irwin, Against the Tide: An Intellectual History of Free Trade (Princeton
1996). Also in paperback.
Part 1 Trade and Globalization Since 1492
1492-1820 Closed: Mercantilist Autarky
1820-1913 Open: First Global Century
1913-1950 Closed: Interwar Autarky
1950-2007 Open: Second Global Century
(c1970-2007 for the Third World)
Qualification: I define each ‘open’ period as an
ongoing transition to world market integration, not
having achieved complete integration.
Defining Globalization
Globalization = market integration = more openness
trade: commodity price convergence – this morning
capital flows: interest rate convergence – some other day
mass migrations: wage rate convergence – Tuesday
morning
Factor and commodity prices are what matter! Yet,
economists (who should know better) still insist on using
trade shares to measure openness and globalizing
markets. A very bad idea, since endogenous variables also
responding to domestic supply and demand, as illustrated
by the three centuries 1492-1820 (or by 1870-1913 and/or
by 1950-2007).
After Columbus: Was There An AntiGlobal Trade Boom 1492-1820?
Actually, there are three questions
[1] Was there a Trade Boom?
[2] If so, why the Anti-Global label?
[3] If so, what did cause the Trade Boom?
The answer has nothing to do with ‘going
open’ since that world was very anti-global.
Yes, Virginia, there was a European
Trade Boom after Columbus
European and World Inter-Continental
Trade Growth 1500-1992
Per Annum
Epoch
Growth (%)
1500-1599
1.26
1600-1699
0.66
1700-1799
1.26
1500-1799
1.06
1800-1899
1900-1992
1800-1992
3.85
3.65
3.70
But there was not any CPC for spices
Amsterdam vs Southeast Asia 1580-1820!
Figure 3.1
Spice and Coffee Markups:
Amsterdam vs. Southeast Asia 1580-1939
Sales price / purchase price
30
25
20
15
10
5
0
1580s
1610s
1640s
1670s
1700s
1730s
1760s
1790s
1820s
Year
Cloves
Black Pepper
Coffee
1850s
1880s
1910s
Nor was there any CPC for textiles
London vs Calcutta!
So, how much of European trade boom
due to world demand and supply boom?
1492-1800: 65% import demand at home, 35%
export supply abroad, 0% “globalization”
1850-1913: 70% import demand and export
supply, 30% “globalization”
1950-2007: 65% import demand and export
supply, 35% “globalization”
Looks like we have found a
historical constant!
In contrast, the First Global Century
had both CPC and a trade boom!
First, documenting the CPC – illustrated by
Atlantic wheat market 1820-1913, and a
boom in the grain trade.
And then, second, documenting the world
trade boom after 1850.
70,000
60,000
160
50,000
120
40,000
30,000
80
20,000
40
10,000
0
0
1800 1825 1850 1875 1900 1925 1950 1975 2000
Anglo-American wheat price gap
British imports of US wheat
Imports, thousands of cwt.
percentage price gap, 3 year moving average
200
When the World Went Open (and
followed the leader)…
British Tariff Rates
1815-27 1828-41 1842-45
72.8
58.5
24.1
69.8
50.4
19.0
Note! Britain ‘went open’ thirty years before
the famous 1846 Repeal of the Corn Laws.
What About Terms of Trade Shocks? Did
Britain have to share her productivity gains
as the Industrial Revolution leader?
Sharing productivity gains from the First
Industrial Revolution with the rest of the world
Figure 7.1
Britain's Terms of Trade, 1820-1872
170
Export/Import price ratio
160
150
140
130
120
110
100
90
80
1820
1825
1830
1835
1840
1845
Year
1850
1855
1860
1865
1870
Figure 1
Latin American Terms of Trade 1811-1939
160
140
120
Px/Pm
100
80
60
40
Average LA TOT Unadjusted
Average LA TOT Adjusted
20
Source: Unadjusted--Clingingsmith and Williamson (2004), Figure 9, based on data in Coatsworth and Williamson (2004a); Adjusted--see
Appendix 1.
1939
Year
1935
1931
1927
1923
1919
1915
1911
1907
1903
1899
1895
1891
1887
1883
1879
1875
1871
1867
1863
1859
1855
1851
1847
1843
1839
1835
1831
1827
1823
1819
1815
1811
0
But, of course, the move to free trade wasn’t
the only, or even the main, force at work
integrating world markets.
The big force was the transport revolution
(1st best replaces 2nd best, e.g. steam engine
vs sail, railroad vs wagon-cum-canals, plus
tfpg=3-5% p. a on all modes as size, density
etc. on all routes rises).
The 19th C Transport Revolution on Sea Lanes
And then a slow approach to steady state …
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
18
18
18
18
18
18
74
79
89
94
99
04
09
14
19
24
29
34
39
44
49
54
59
64
69
74
79
84
89
94
-1
9
90
-1
9
85
-1
9
80
-1
9
75
-1
9
70
-1
9
65
-1
9
60
-1
9
55
-1
9
50
-1
9
45
-1
9
40
-1
9
35
-1
9
30
-1
9
25
-1
9
20
-1
9
15
-1
9
10
-1
9
05
-1
9
00
-1
8
95
-1
8
90
84
18
-1
8
85
84
-1
8
80
-1
8
75
-1
8
70
Figure 2.2: Real Global Freight Rate Index(1869-1997) (1884=1.00)
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
What about impact of globalization on DeIndustrialization in the Poor Periphery?
Did manufacturing get wiped out there, and did this
suppress economic growth there and contribute to
the growing North-South Gap?
Find out the answer
Tuesday 1-2pm
Williamson Institute Seminar
“Globalization, De-Industrialization and
Divergence in the Third World before the
Modern Era”
Postscript
All of these questions have also been posed
of world trade globalization experience
since 1970.
Are there lessons of history from the First
Global Century for the Second, or are
conditions sufficiently different to modify or
even overturn the lessons?
If so, what conditions?
Ponder these questions while we break for
coffee and tea.
Part 2 Distribution and Growth Impact
2.1 Growth
Four kinds of modern studies have
tried to assess the gains from freer
trade, or the losses from more
protection, especially in developing
countries. The focus is usually on
growth performance, rather than
simply once-off comparative static
gains.
First
NBER project on trade and exchange-control regimes in
the 1960s and 1970s used classic partial-equilibrium
calculations of deadweight costs (Harberger Triangles).
Concluded that the barriers imposed significant costs on
Argentina, Chile, Colombia, Egypt, Ghana, India, Israel,
Mexico, Pakistan, the Philippines, South Korea, Taiwan,
and Turkey.
By themselves, these calculations were vulnerable to the
charge of assuming, not proving, that trade barriers were
bad since they assume that all relevant effects are
captured by measures of consumer and producer
surplus.
What about allowing protection a chance to lower long-run
cost curves, as in traditional infant-industry case? What
about impact on industrialization and thus growth, as in
modern growth theory where industry is the carrier of
productivity advance and capital deepening?
Second
Cross-country growth studies that contrast
the growth performance of relatively open
and closed economies.
The World Bank conducted such studies for
41 countries in the periods before and
after the first oil shock. Table 3 extends
this coverage through 1992.
Table 3
Trade-Policy Orientation and Growth Rates in the Third World, 1963-1992
Trade policy orientation
Average annual rates growth of GDP per capita
1963-1973
1973-1985
1980-1992
Strongly open to trade
Moderately open
Moderately anti-trade
Strongly anti-trade
6.9%
4.9%
4.0%
1.6%
5.9%
1.6%
1.7%
- 0.1%
6.4%
2.3%
- 0.2%
- 0.4%
NOTE: Bairoch used the same (crude) methodology to report the exact opposite
correlation for late 19th century Europe, a correlation that Kevin O’Rourke confirmed
using more modern and sophisticated econometrics. More on the European
paradox later.
Table 3 correlation is vulnerable to three
criticisms.
First, assigning countries to trade policy
categories is always tricky, since it is hard to
measure overall openness. The worst studies
use endogenous variables like X/Y or
[X+M]/Y.
Second, and much more importantly, it is hard to
isolate the effect of trade policies alone, since
other policies are usually changing at the same
time. Liberalism typically comes as a
package.
Third, causality! Is it political economy?
Third
Event studies (e.g. economic history). Strategy is
to focus on periods when trade policy changed
the most so as to see its effect on growth.
Anne Krueger looked at trade opening moments
in South Korea around 1960, Brazil and
Colombia around 1965, and Tunisia around
1970. Growth improved after liberalization in all
four cases (Krueger 1983, 1984).
David Dollar and Aart Kraay (2000) examined
the reforms and trade liberalizations of 16
countries in the 1980s and 1990s, finding, once
again, the positive correlation between freer
trade and faster growth.
Critique: Again, one can argue that the
liberal reform episodes changed more
than just participation in the global
economy – like liberalizing their domestic
factor markets, liberalizing their domestic
commodity markets, and setting up better
property-rights enforcement. Thus, an
independent trade effect has not been
isolated.
Fourth
Multivariate econometric analysis (growth
regressions): Even with several other variables held
constant, these studies show that freer trade is
associated with more growth. A zillion regressions.
Critique: Omitted variables, causality and simultaneity.
Critique: Depends on when a country goes global.
Are its trading partners liberalizing too?
Are its competitors liberalizing?
Is the liberalizing country ready for industrialization,
accumulation, and human capital deepening, or will it be
driven instead up some primary-product dead end?
Economic history matters: Conditions were less
auspicious for Third-World liberalization during 19141960 (world autarchy) than since 1960. Or the 1980s
and 1990s (China) compared with the 1960s and 1970s
(no China).
Table 3
Tariff Impact on GDP per capita Growth by Region
Dependent Variable:
Included Countries
Years per Period
Time Interval
ln GDP/capita
ln Own Tariff
(European Periphery
dummy) x (ln tariff rate)
(Latin America
dummy) x (ln tariff rate)
(Asia dummy) x
(ln tariff rate)
Euro Periph dummy
Latin America dummy
Asia dummy
Constant
Country Dummies?
Time Dummies?
N
R-squared
Adj. R-squared
5-Year Overlapping Average Growth Rate
(1)
(2)
(3)
(4)
ALL
1
1875-1908
ALL
1
1875-1908
ALL
1
1924-1934
ALL
1
1924-1934
0.15
1.14
0.14
1.64
-0.21
-1.24
0.19
0.94
-0.26
-1.09
-0.12
-0.11
No
No
1,190
0.0357
0.0317
0.10
0.75
0.56
3.35
-0.72
-3.32
-0.97
-3.15
-0.19
-0.84
1.58
2.77
3.01
3.13
0.30
0.55
-0.76
-0.68
No
No
1,190
0.0498
0.0433
-0.73
-1.77
0.36
1.27
-0.04
-0.08
-0.73
-1.31
-1.17
-1.52
5.92
1.55
No
No
372
0.0227
0.0094
-0.89
-2.13
1.65
2.83
-2.45
-3.18
0.58
0.49
-1.47
-2.02
6.15
3.10
-3.31
-0.96
2.39
1.24
3.99
1.05
No
No
372
0.0605
0.0398
Part 2 Distribution and Growth Impact
2.2 Distribution
Who Gained and Who Lost from
Globalization in the First Global Century?
Three Big Distribution Issues
Globalization and the Big Rise in World
Inequality (mainly between rich
core and poor “Third World”)
World Trade and Changing Income
Distribution within Countries
Mass Migration and Changing Income
Distribution within Countries
There certainly was convergence between
the members of the greater Atlantic
economy in the First Global Century.
And inequality rose in the labor scarce
Atlantic economies and fell in the labor
abundant Atlantic economies.
The impact of migration and trade
on inequality within countries
Globalization and Inequality 1870-1913
swe
Annual change (%) in equality index
1
0.5
den
nor
ita
bel
-0
por
-0.5
ger
net
uk
fra
can
spa
-1
aust
usa
-1.5
-40
-20
0
20
Migration’s impact on the labor force (%)
40
But what about the rest of the world and
what about the rest of the five millenia
1492-2007?
Some awkward facts for the
globalization induces inequality thesis
Fact #1: Dramatic income divergence
around the globe over the past two
centuries
Two big facts supporting the
globalization induces inequality thesis
Fact #1: Dramatic income divergence around the
globe over the past two centuries. And all from
between inequality.
Fact #2: Since the 1820s, there has also been an
impressive worldwide increase in commodity
and factor market integration, despite the
temporary and disastrous retreat during the
World Wars and the troubled era in between. So
far, so good. The globalization-inequality
correlation holds.
Table 1. Epochal Shifts in Globalization since 1820
Epoch
A. Intercontinental
Commodity Market Integration
B. Migration and
World Labor Markets
C. Integration of
World Capital Markets
Change in price
gaps between Why they
continents
changed
How the migrant
shares changed in the
receiving countries
What happened to
integration (FeldsteinHorioka slope coefficient)
Why they
changed
1820 - 1914 Price gaps cut 72% due to cheaper
by 81%
transport, 28% due to
pre-1870 tariff cuts
Migrant shares rise
Passenger transport cost
slashed, push and
pull (Immigration
policies remain neutral)
60% progress from
complete segmentation
toward market integration
1914 - 1950 Gaps double Due to new trade
in width, back barriers only
to 1870 level
Migrant shares fall
Restrictive
immigration
policies
Revert to complete
market segmentation
1950 - 2000 Price gaps cut
(especially by 76%, now
since 1970) lower than
in 1914
74% due to policies
freeing trade,
26 % due to cheaper
transport
Migrant shares rise
Transport costs drop,
push and pull again
(No net change in
immigration policies)
Again 60% progress from
complete segmentation
toward market integration
Overall
Price gaps
1820 - 2000 cut by 92%
18% due to policies,
82% due to cheaper
transport
No clear change in
US migrant shares,
but rises elsewhere
Policy restrictions,
offsetting transport
improvements
60% progress from
complete segmentation
toward market integration
Two big facts rejecting the globalization
induces inequality thesis
Fact #3: However, income gaps almost
certainly widened from 1600 or even
earlier. This early modern “great
divergence” was true in all dimensions –
between and within European nations.
Fact #4: The pre-1800 epoch was antiglobal.
Bottom Line: Globalization could not have
contributed to rising “world” inequality.
Even though B-M show that between inequality
changes did all the work, within inequality changes
could still have been dramatic.
Two Questions
• How much work did Heckscher-Ohlin and
Stolper-Samuelson do (especially when it
was re-inforced by mass migration)?
• Would we expect the same today? (If not,
why not?)
A big bottom line
There is absolutely nothing inconsistent about the simultaneous
appearance of powerful relative factor price convergence and
powerful absolute factor price divergence in the global economy.
Globalization can explain the relative factor price convergence
before 1940.
But deeper explanations are needed to account for absolute factor
price divergence like culture, geography and institutions as
they influence the rates of technical progress and human capital
deepening between core and periphery. Indeed, if technical progress
tends to raise the efficiency of all factors (e.g. no factor saving), then
globalization and commodity price convergence will drive relative
factor price convergence with even more certainty.
Still, what is striking about pre-1940 world economic experience is that
both relative factor price convergence and absolute factor price
divergence were so hugely powerful, at the same time.
Would we expect the same today?
If not, why not?
Tak!