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Inaugural Lecture Universitat Pompeu Fabra October 8 2008. Globalization and the Great Divergence. Jeffrey G. Williamson Harvard University and the University of Wisconsin. Motivation.

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globalization and the great divergence

Inaugural Lecture

Universitat Pompeu Fabra

October 8 2008

Globalization and the Great Divergence

Jeffrey G. WilliamsonHarvard University and the University of Wisconsin

motivation
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

problems
Problems

Fundamentals don’t 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

four big facts
Four Big Facts

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

the rise of the north south gap
The rise of the North-South gap

Source: Maddison (2001, Table B-21)

four big facts1
Four Big Facts

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

Fact 2: De-Industrialization in the Poor Periphery

do industrial countries get richer
Do Industrial Countries Get Richer?

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

per capita levels of industrialization 1750 1953
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.

more de industrialization figures
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

four possible causes of de industrialization in the poor periphery
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

four big facts2
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

what caused the 120 year secular boom bust in terms of trade for primary product producers
What caused the 120-year secular boom-bust in terms of trade for primary-product producers?

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.

First

the 19 th century transport revolution on sea lanes
The 19th Century Transport Revolution on Sea Lanes

And then a slow approach to steady state …

second
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.

third
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.

four big facts3
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

four big facts4
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

one big question
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 secular improvement in the terms of trade for a primary product exporter
What’s 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

what s the impact of a secular improvement in the terms of trade for an exporter of manufacturers
What’s 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 …

slide28
What Should We Find in History?

Asymmetric impact

of secular terms of tradeimprovement

Core versus Periphery!

what s the impact of terms of trade volatility on the exporter of manufactures in the rich core
What’s 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;

● theirexport prices are less volatile.

slide30
What’s 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.

slide32
What Should We Find In History?

Asymmetric impact

of terms of trade volatility

Core versus Periphery!

identification assumptions two concerns
Identification Assumptions: Two Concerns

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.

First

second1
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

a new historical database annual 35 countries 1870 1939
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.

slide36

Growth and the Terms of Trade 1870-1939

(Dependent variable: Decadal average GDP per capita growth)

Robust standard errors in

brackets

** significant at 5%

slide37

Growth and the Terms of Trade 1870-1939

(Dependent variable: Decadal average GDP per capita growth)

Robust standard errors in

brackets

** significant at 5%

slide38

Growth and the Terms of Trade 1870-1939

(Dependent variable: Decadal average GDP per capita growth)

Robust standard errors in

brackets

** significant at 5%

slide39

Growth and the Terms of Trade 1870-1939

(Dependent variable: Decadal average GDP per capita growth)

Robust standard errors in

brackets

** significant at 5%

slide40

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%

what about pre 1870 history
What About pre-1870 History?

The data aren’t 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.

what about pre 1870 history1
What About pre-1870 History?

The data aren’t 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.

bottom lines
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.

lessons of history
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.