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Globalization and the Great Divergence

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

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  1. Inaugural Lecture Universitat Pompeu Fabra October 8 2008 Globalization and the Great Divergence Jeffrey G. WilliamsonHarvard University and the University of Wisconsin

  2. 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

  3. 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

  4. Four Big Facts Fact 1: Rise in the Core-Periphery Income Per Capita Gap

  5. The rise of the North-South gap Source: Maddison (2001, Table B-21)

  6. … and extending backwards with real wages

  7. Four Big Facts Fact 1: Rise in the Core-Periphery Income Per Capita Gap Fact 2: De-Industrialization in the Poor Periphery

  8. Do Industrial Countries Get Richer? Current GDP per capita 1820-1950 and Industrialization 50 or 70 Years Before

  9. 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.

  10. 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

  11. 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

  12. 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

  13. The 18th c calm before the storm …

  14. The 19th c storm …

  15. Some more than others

  16. And the terms of trade bust, as seen from Latin America 1811-1939

  17. 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

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

  19. 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.

  20. 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.

  21. 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

  22. 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

  23. One Big Question Are the correlations spurious or are they causal? So, what about the theory, and what about the magnitudes?

  24. 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

  25. 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 …

  26. What Should We Find in History? Asymmetric impact of secular terms of tradeimprovement Core versus Periphery!

  27. 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.

  28. 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.

  29. And risk-aversion begats lower accumulation! So ….

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

  31. 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

  32. 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

  33. 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.

  34. Growth and the Terms of Trade 1870-1939 (Dependent variable: Decadal average GDP per capita growth) Robust standard errors in brackets ** significant at 5%

  35. Growth and the Terms of Trade 1870-1939 (Dependent variable: Decadal average GDP per capita growth) Robust standard errors in brackets ** significant at 5%

  36. Growth and the Terms of Trade 1870-1939 (Dependent variable: Decadal average GDP per capita growth) Robust standard errors in brackets ** significant at 5%

  37. Growth and the Terms of Trade 1870-1939 (Dependent variable: Decadal average GDP per capita growth) Robust standard errors in brackets ** significant at 5%

  38. 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%

  39. 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.

  40. 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.

  41. Reminder: Terms of trade boom versus bust (in Latin America)

  42. 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.

  43. 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.

  44. Many thanks!

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