BOOK REVIEW

GLOBALIZATION AND HISTORY
By
Kevin H. O'Rourke and Jeffrey G. Williamson

FUTURECASTS online magazine
www.futurecasts.com
Vol. 3, No. 3, 3/1/01.

 Homepage

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Pre-WW I Globalization:

  This book seeks to shed light on the phenomenon of "globalization" by examining the extensive globalization processes - far more extensive than today - that took place about a century ago (between roughly 1850 and the start of WW I) and the autarkic period between the World Wars. It seeks to provide some at least partial answers to such questions as --

  • the character of that globalization,
  • the extent to which it assisted poor nations in catching up to rich nations ("convergence"),
  • which aspects of globalization - capital flows, labor migration, trade, technology transfer - had the most important impact on factor markets and tendencies towards real wage and gross domestic product (GDP) convergence,
  • to what extent did the various Atlantic economies participate,
  • who gained and who lost, and
  • the character of the political opposition to globalization mounted by the losers that ultimately led to the autarky that began towards the end of the 19th century and ended globalization after WW I.

  The authors try to relate the answers to these questions to current globalization processes and controversy, especially with respect to the controversy over increasing inequality.
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It is as important to be as aware of what this book doesn't cover as of what it does cover.

  To a commendable extent, the authors succeed in these important efforts. They do, in fact, succeed in shedding important light on the 19th century globalization process - much of which is applicable to analysis of the current globalization process. The authors also attempt to point out the primary differences between the two globalization periods.
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  To their credit, they are always candid about the natural limitations of their analytical efforts. These limitations are caused by the limits of the economic statistics available from that time and from the various nations, and because of the continuing limitations of the econometric analytical tools that they apply. They do a commendable job in utilizing available empirical data to check the validity of their analytical results.
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  However, when evaluating their conclusions - especially with regard to application of their findings to the current controversy over globalization - it is as important to be as aware of what this book doesn't cover as of what it does cover - something the authors do not deal with adequately. The most important omissions involve the impacts on middle class standards and participation rates (upwards mobility) - a defect that will be pointed out at various points below.

Convergence of the real wages of the working poor:

 

 

The open economy mechanisms - trade, migration, and capital flows - viewed as essential to 19th century convergence "operated directly on factor prices, and thus only indirectly on GDP per capita."

  In analyzing the economic trends in the period before globalization (about 1830 to 1850) - during globalization (about 1850 to WW I) - and during deglobalization (from WW I to 1940) - the book provides some coverage of GDP statistics per capita and GDP per worker hour, but wisely considers these macroeconomic aggregates inadequate. They are generally unreliable and frequently not even available. However, perhaps the most important defect is that, by averaging all incomes, they omit much valuable data needed to understand the factors affecting migration patterns, political responses to globalization, and the sources of convergence.
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  The book instead concentrates on factor prices
- especially purchasing-power-parity (PPP) adjusted real wages. Factor prices, too, have reliability problems. However, they are frequently based on market prices - which considerably reduces reliability problems - and they are at least more widely available. The open economy mechanisms - trade, migration, and capital flows - viewed as essential to 19th century convergence "operated directly on factor prices, and thus only indirectly on GDP per capita." It is impossible to understand the particular impacts of the particular globalization mechanisms on particular nations by relying solely on the GDP averages.

 

 

 

 

The book makes no attempt to evaluate upward mobility among the working poor - what proportion of the work force was skilled, and what proportion remained unskilled and among the working poor, over time and over generations - and what role globalization may have played in this process.

   Actually, the book concentrates on the basic real wages of male urban unskilled workers - the working poor. It makes no attempt to evaluate real wage trends among the slowly increasing proportion of workers that were skilled and white collar and that were gradually rising above the level of the working poor and even filling the ranks of the expanding lower middle class. It makes no attempt to evaluate upward mobility among the working poor - what proportion of the work force was skilled, and what proportion remained unskilled and among the working poor, over time and over generations - and what role globalization may have played in this process. These other workers and classes are only referred to with respect to discussion of wage inequality.
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  This limitation exists because of the limits of available 19th century statistics. The authors simply don't have the data to do more. Nevertheless, this must be kept in mind as one of the book's most important omissions, considering the vast proportional increase in the middle class over the course of the last half of the 19th century and during the 20th century - and the importance of upward mobility in evaluating globalization both now and a century ago. At least when discussing 20th century globalization after WW II, the authors should have attempted more.

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  Technology:

  Advances in transportation and communication technology were important factors in 19th century globalization - far more important than in the current globalization, as the authors clearly set forth.
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  The breakdown of the technological barriers to trade caused major convergence of commodity prices and thus had considerable impact on such factor prices as labor and land, which the authors extensively analyze. They find that these impacts varied with certain variations in the economic characteristics and economic policies of the various participating nations - and emphasize that, as important as they were, they were in no event nearly as important as mass migration.

  Of course, this factor would have been considerably more important if not quickly and increasingly offset by trade restraints as the period progressed.

Politics:

  The political forces that first led to trade liberalization and then increasingly towards restraints first on trade and then on migration are covered.
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Migration:

 

  Then, the authors zero in on migration - the character, causes, and impact of the mass migrations that started with the Irish famine in the 1840s. They demonstrate that this was by far the most important convergence factor of 19th century globalization - and point out that current levels of migration are nowhere near the scale of those before WW I.
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Forces of autarky:

  Finally, the authors set forth the winners and losers of 19th century globalization, and how the losers increasingly gained political influence sufficient to begin raising restraints to trade and migration. Ultimately - after WW I - these restraints became sufficient to end globalization in both trade and migration.
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  Here, the authors concentrate primarily on the growing backlash of agricultural capital in the land poor nations. They increasingly fought against cheap agricultural imports of the land rich New World nations. They also concentrate on the backlash of labor against either immigration or trade or both.
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  The protectionist inclinations of industrial capital varied by country and industry, as might be expected. Globalization's contribution to aggregate economic growth and its benefits to the growing middle class are mentioned but not extensively evaluated, although the fact that the working poor enjoyed substantial increases in real wages everywhere among the "Atlantic economy" nations but in Iberia (Spain and Portugal) during the pre WW I globalization period are clearly set forth.
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Capital:

  Capital flows are also analyzed, with concentration on the questions of why more capital didn't flow to low wage nations on the European periphery as economic theory indicated it should, and what was the convergence impact of the capital flows that did flow to those low wage nations.

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Convergence:

  Spectacular convergence was achieved between 1850 and WW I by such peripheral poor nations in the "Atlantic economy" (European nations and nations with European origins) as Ireland and the Scandinavian countries. However, the Iberian duo and the East European nations fell further behind.
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Modern convergence:

  The forces of convergence in the "third world" during the last three decades of the 20th century have been similarly powerful and increasingly studied. Where convergence has failed, specific weaknesses - such as trade restraints, smothering levels of regulation, weak or nonexistent property rights, demographic factors, natural resource limitations, and inhospitable political environments - have been identified.

  The role of corruption and weak legal enforcement systems in retarding development and convergence is the subject of next month's book review, Michael Backman, "Asian Eclipse," about "the dark side" of business in Asia.

  Modern scholarship has pointed out that a major source of this 20th century convergence comes not from globalization, but simply from the benefits of applying available technology -"technological catch-up."

  However, every such modern instance that comes to mind has been materially assisted by the capital flows of modern globalization - a point the authors of this book omit.

19th century convergence:

 

 

The period of gold standard monetary systems - trade liberalization - increasing trade and capital flows - migration liberalization - and sharp advances in transportation and communication efficiency - was a golden era of economic development for wealthy nations.

Those poor nations that participated grew even faster than the wealthy nations.

 

The revolutionary advances in transportation and trade greatly reduced costs for many of the major components in worker cost of living. This helped real wages converge faster than GDP per worker hour and thus faster than labor productivity.

Mass migration, too, impacted real wages more than the economic aggregates.

Concentration on real wages and other particular factor prices - commodity prices and land rents - helps to clarify the sources of opposition that eventually destroyed pre-WW I globalization.

Just two decades of autarky after WW I was sufficient to set back real wage dispersion to the levels of the 1870s.

  Steep divergence patterns existed during the autarkic first half of the 19th century. This is convincingly demonstrated even by the very limited statistical evidence available from that time. Industrialization first in England and then in a few other European nations - Germany, France, and Belgium - augmented by resource advantages in the industrializing "New World" nations - the United States and Australia - was rapidly leaving the rest in the dust.
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  Sometime around the middle of the 19th century, this changed. This period of gold standard monetary systems, trade liberalization, increasing trade and capital flows, migration liberalization, and sharp advances in transportation and communication efficiency was a golden era of economic development for wealthy nations. Even Britain - which was being overtaken by rich and poor European nations alike - experienced unprecedented economic growth.
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  But those poor nations that participated grew even faster than the wealthy nations. Particularly striking was the extent to which real wages in participating European nations began to catch up with the real wages in the United States and Australia - the wealthy New World nations. Worker living standards in labor-abundant Europe began to catch up with those in the labor-scarce New World nations.
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  Most of the convergence, however, took place before the turn of the century, and it was not quite as rapid as later during the post WW II period. Indeed, the United States actually increased its lead in the last half of this period, especially with respect to England, Germany, France and Belgium - the wealthy industrial core of Europe. The great acceleration of growth in the United States accounted for much of the slowdown in convergence towards the end of the 1850 to 1914 period.
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  The economic aggregates - GDP per capita and GDP per worker hour - also showed convergence, but not as extensive as real wage convergence. Among the reasons for this was that worker costs of living fell far more than any implicit GDP price deflator. The revolutionary advances in transportation and trade greatly reduced costs for many of the major components in worker cost of living. This helped real wages converge faster than GDP per worker hour and thus faster than labor productivity.
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  Similarly, the mass migration mainly of young male workers impacted labor force participation rates - raising them in rich immigrating nations and lowering them in poor emigrating nations. This, again, caused convergence to show up more in real wage rates than in the economic aggregates.
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  The authors contend that this is why several scholarly studies that relied on the GDP aggregates have missed so much of the pre WW I convergence. They also emphasize that concentration on real wages and other particular factor prices - commodity prices and land rents - helps to clarify the sources of opposition that eventually destroyed pre-WW I globalization.
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  Among the poor nations on the European periphery,
Spain and Portugal did not participate and actually fell behind, as apparently did such nations as Egypt, Turkey, and Serbia. The Scandinavian nations and Austria enjoyed the most spectacular success, and Ireland and Italy enjoyed about average convergence. Among poor Latin American nations, Argentina and, apparently, Chile and Uruguay, also enjoyed considerable convergence.
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  After WW I, it took just two decades of autarky - of capital controls, restrictive immigration quotas, and levels of restraints on trade that amounted to a world wide trade war - to cause global labor market disintegration and real wage dispersion sufficient to restore real wage gaps in the Atlantic economy back to the levels of the late 1870s. Here, again, studies based on GDP aggregates miss the point revealed by factor prices. Of course, WW II was a disaster for almost all European nations.

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Advances in transportation and communication technology:

  All the methods of measuring market integration have their weaknesses. The authors have chosen to emphasize price gaps between pairs of markets, but also consider several other types of evidence.
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  The "enormous" advances
in ocean and inland shipping, railroad construction, and refrigeration during the 19th century are reviewed. The impact of these advances within national markets - especially within the United States and later within Russia - was just as important as their impact on international trade. Prior to the catastrophes of WW I and Communism, Russia was able to export 42 percent of its grain crop.
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Before WW I - both nationally and internationally - markets were becoming better integrated - and the integration was faster within national markets because these were not burdened by trade restraints.

  Germany and France reacted to imports of inexpensive New World grain by raising tariff barriers after the middle of the 1870s. Thus, after the 1860s, all commodity market integration was due to falling transportation costs, while most commodity market integration after 1950 was due to trade liberalization.
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  In nations belonging to the modern Organization for Economic Cooperation and Development (OECD), exports as a share of GDP rose from 5.9 percent in 1870 to 8.2 percent in 1913, fell to 5.2 percent by 1950 and increased to 12.8 percent in 1987. However, the authors point out that these figures reflect somewhat imperfectly the course of globalization and the economic devastation of "Europe's Second Thirty Years War" that began in 1914. These figures tend to understate the increase in international commodity market integration - because of the increasing share of GDP comprised of services and goods not traded internationally - and can be influenced in various ways by such factors as frontier settlement and technological advances.
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  Before WW I - both nationally and internationally - markets were becoming better integrated - and the integration was faster within national markets because these were not burdened by trade restraints.

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Political reactions to increases in international competition:

Napoleonic War "import-substituting" industries needed protection.

  The forces of 19th century autarky in Europe had been strengthened by the "import-substituting industries" that developed during the Napoleonic Wars. Their influence could still be felt as late as the middle of the 20th century. Corn Law liberalization in England, beginning in 1828 and completed in 1846 along with decisive moves towards free trade, were shortly followed somewhat by several small European nations (the Netherlands, Denmark, Portugal and Switzerland, and then by Sweden and Belgium).
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Trade liberalization began with bilateral trade agreements and "most favored nation" provisions - and the efforts of Napoleon III.

  Then, in the 1860s came the first major bilateral trade agreement, between Great Britain and France, containing a "most favored nation" (MFN) provision. By 1877, Germany had become virtually a free trade nation, and average European tariffs on manufactured items had declined to about 10 percent - about perfect for revenue raising without being a serious impediment to commerce.
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  Much of the credit was due to Napoleon III. He had been influenced by Ricardo and other free trade theorists, and by his observations while in England. However, as might be expected, free trade was made broadly attractive - especially in Germany and France - by the benefits it bestowed on various economic interests.
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The United States - and European agricultural interests - were primarily responsible for the protectionist backlash.

  The reaction began in the United States in 1865, with the defeat of the Confederacy - which was comprised of states that favored free trade - and the need to raise tariffs as a revenue raising measure to pay off war debts.
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  In Europe, political backlash against rising competitive pressures
led to periodic increases in trade restraints - starting late in the 1870s - that partially offset the advances in transport efficiency, and overwhelmed them after WW I. Transportation costs declined about 45 percent in the sixty years before 1910. Agricultural imports began to heavily impact land values, and various manufacturers also sought protection from foreign competition.
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  Price gaps in agricultural products, raw materials, and textiles declined substantially prior to WW I, despite rising trade restraints. However, the decline was far less for manufactured items. Similar results were seen in Asia, especially in Japan.

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Winners and losers from trade expansion:

  Measuring the impact of pre WW I globalization is not easy. The real world is far more messy than a static trade theory graph. The authors point out that other major factors have to be considered - like industrialization, technological advances, and demographic revolutions. Nevertheless, static trade theory predicts convergence of factor prices, and shifts in land values and in the ratio of wages to rents. The available statistics provide substantial evidence for evaluation.
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19th century economic developments conformed well to traditional factor endowment trade theory, and didn't conform to certain competing modern models, such as those of Elhanan Helpman and Paul Krugman that include consideration of returns to scale and imperfect competition.

  The available statistical evidence of factor price movements coincides "remarkably well" with expectations from accepted static trade theory, and the few exceptions are generally easily explained by exceptional circumstances that the authors cite for the pertinent nations. (For example, Denmark land values were sustained by the switch away from grain production and into intensive grain consuming animal husbandry.)

"Real wages grew everywhere, but they grew faster in labor-abundant Europe compared with the labor-scarce frontier. Rents surged in the land-abundant New World and plunged in land-scarce, free-trading Britain, while remaining relatively stable on the European Continent, which either protected its agriculture or made profound structural changes in farming practice. And the wage-rental ratio increased dramatically in Europe, especially in free-trading countries, while declining equally dramatically in the frontier economies of the New World."

  How much of this was due to mass migration and technological advance rather than free trade is another question the authors believe should be disentangled because of its relevance to the question of growing wage inequality under current trade liberalization conditions. They use two analytical methodologies - the computable general equilibrium (CGE) approach and simpler econometric general equilibrium approaches.
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  A wide array of recent scholarly studies have served to confirm the view that 19th century economic developments conformed well to traditional factor endowment trade theory, and didn't conform to certain competing modern models, such as those of Elhanan Helpman and Paul Krugman that include consideration of returns to scale and imperfect competition.
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  The results, generally conforming to standard trade theory, nevertheless demonstrated sharply varying degrees of responses - as would be expected in line with such other variables as exposure to trade, resource endowments, trade patterns, and trade policies. Trade predictably had its greatest impact where trade was relatively free, but was limited or even negated where trade restraints predominated. Available statistics from Asia indicate similar results.
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Real Wages:

 

Generalizations should not be drawn based on the experience of any particular economy.

  For the convergence of real wages, other globalization factors seemed far more important than did trade, which frequently tended to aid wealthy high wage nations as much as poor low wage nations. Convergence of other factor prices were heavily influenced by trade.
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  Each nation thus has to be evaluated separately in light of its unique economic and political characteristics. When evaluating current globalization, and the impact of North-South trade on OECD nations, the authors warn that generalizations should not be drawn based on the experience of any particular economy.
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Land values:

  Trade also had its most predictable impact on land values - since capital and labor are mobile and could move between town and country, but agricultural land could not be so readily switched and thus was far more vulnerable to the shock of increased import competition. The authors find that it is no accident that the strongest voices for protection come from the European agricultural sector. In continental Europe - where landed interests still wielded dominant political power - the response was the imposition of tariffs to offset advances in shipping technology.
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  But in England, by the end of the 19th century, social and political dominance had shifted from landed wealth to the rising industrial class, which was content to have cheaper food and cheaper labor. Thus, no action was taken to protect or assist farm interests. The impact on the Irish landlord class was even greater.

  Again, the authors omit the influence of growing middle classes, which were already far larger in England than in most other nations.

Protectionist backlash:

 

 

 

The same protectionist pressures are still reflected in modern protectionist measures in Europe and the United States.

 

 

 

The United States, too, had Napoleonic War "import-substituting" industries that needed protection.

  Examples of backlash against globalization became increasingly evident and powerful after 1878.

  • Continental Europe imposed tariffs on agricultural and manufactured imports to protect agricultural interests and some manufacturers.
  • Britain, Ireland, the Netherlands and Denmark maintained their commitments to free trade.
  • The United States began to slowly increase immigration restrictions to shield domestic labor, and imposed high tariffs on manufactured imports to protect domestic manufacturers.

  To this day, the authors point out, these pressures are still reflected in the restraints of the European Common Agricultural Policy and in complaints about "cheap labor" import competition in the United States.
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  After 1878, both Germany and France began raising tariffs on both agricultural and manufactured goods. Most smaller nations followed. Even a decade before WW I, tariffs had generally reached substantial trade blocking proportions - eliminating most and sometimes all the benefits of reduced import shipping costs.
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  The authors blame agricultural interests as the primary European movers against trade liberalization, but also note the particular industries in the various nations that sought protection from competing imported manufactured goods. Much of the opposition to these trade restraints from businesses that relied on imported supplies was bought off with tariff protections of their own. This left few allies for the natural opponents of trade restraints - those directly involved in international commerce, light industry and consumer interests. (These are largely middle class groups.) Labor and socialist politicians generally opposed agricultural tariffs.
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  However, as the authors point out, the response to globalization was very complex, and all national economies experienced different impacts from globalization. The authors demonstrate considerable correlation between the severity of these impacts and the extent of backlash in the various nations.
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  In the United States,
agricultural interests generally favored free trade and manufacturers favored protection - as classic trade theory would predict for a land abundant, capital short nation. Here, too, the development of import-substituting industries during the blockade and embargo period of the Napoleonic Wars had a lasting impact on the trade policy debate.
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  Tariffs were raised for revenue purposes as a result of the Civil War, but were thereafter kept in place at exceptionally high levels by the protectionist Republican dominated Congress. Other New World nations followed suit for similar reasons. Tariff levels in the New World nations generally favored manufactured items over agriculture, and came to exceed those in Europe.
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  The stage was clearly set for the autarkic period after WW I.

  The authors omit any mention of the extent to which international trade may have contributed to the increases in the size of - and average living standards for - the skilled worker class and the white collar and middle class during the pre-WW I globalization period. They mention the latter groups only with respect to wage inequality. Although then rapidly growing, they were in any event much smaller than today.

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Mass migration:

  About 60 million Europeans migrated to New World nations - the majority coming to the United States - in the century after 1820. The pace picked up towards the end of the 19th century and in the beginning of the 20th century as travel costs were greatly reduced, personal resources were increased by economic development, and remittances from earlier emigrants aided those who came afterwards. Towards the end of this period - as transportation costs plunged - return migration flows of 30 percent and more became a serious factor, especially for emigrants from the Latin European nations.
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Emigration rates were lowest from poor European nations and sections - where incentives for emigration were greatest

  Contrary to theoretical expectations, however, emigration rates were lowest from poor European nations and sections - where incentives for emigration were greatest - and highest from wealthy European nations and sections. Rising real wages at home did not at first appear to decrease emigration in the late 19th century.
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  Almost two thirds of all U.S. immigrants were male, and over three quarters were young working age adults, between the ages of 15 and 40. Most were unskilled, and the skill levels declined as the period proceeded and more migrants came from the illiterate peasant populations of Eastern and Southern Europe. Some came to escape famine, war or persecution, but the vast majority came willingly - attracted by better New World living conditions.
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Real wage gap factor:

  Factors determining mass voluntary migration rates have been the subject of recent scholarly studies. They indicate the importance of the real wage gap between home and destination - as might be expected. However, unskilled workers in some nations were simply too poor to bear the costs of migration - they were trapped by poverty. This constraint was released only marginally by industrialization and rising real wages at home.
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Path dependency factor:

  The primary release from the poverty trap came from a "path dependency" factor - remittances, prepaid tickets, and assistance upon arrival from the growing number of previous emigrants. Thus, the early migration from Ireland forced by famine played a major role in later Irish migration rates. This is the reason given for the fact that real wage convergence was at first accompanied by rising emigration rates and was only later accompanied by the expected decline in emigration rates.
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The authors believe that the European mass migration would have petered out in the 1920s even without the quotas and the ending of immigrant subsidies.

  Demographics also played a major role, with substantial increases in emigration occurring approximately 20 years after substantial increases in birth and survival rates in the various nations.

  "In the early phases of emigration and modern development, the positive impact of the demographic transition, industrialization, and the increasing number of previous emigrants abroad outweighed the negative impact of real wage catch-up. Thus, although European real wages were slowly catching up on real wages in more labor-scarce destinations, emigration rates surged. But as demographic transition forces petered out, as the rate of industrialization slowed, and as the emigrant stock abroad began to level out, real wage convergence between labor markets at home and abroad increasingly dominated events. - - - This fall accelerated - - - as the young adult cohort - - - declined in relative importance."

  It is thus the opinion of the authors that European mass migration would have petered out in the 1920s even without the quotas in the United States and the ending of immigrant subsidies in such New World nations as Argentina, Australia, Brazil, and Canada.

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Winners and losers from mass migration:

 Mass emigration was the largest single factor in both real wage and GNP convergence. Despite partial offsets from such factors as capital and trade flows, adjustments in comparative advantage, frontier and natural resource exploitation, and increased economies of scale in destination nations - recent studies indicate that mass emigration was a major contributor to real wage and GNP convergence in participating nations.
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  For Ireland, migration may have accounted for about half the real wage growth and over one quarter of the GNP growth. It may have accounted for about one third of Irish convergence on Britain and the United States. Because immigration from all sources is estimated to have held United States unskilled urban real wages between 8 and 15 percent below where they otherwise might have risen, migration may have accounted for ALL the convergence between the two nations.

  Here, too, omitted from the analysis is the impact on upwards labor mobility, and on the real wages of the growing ranks of skilled and white collar workers and other members of the rapidly growing middle class in the United States, who didn't compete with new immigrants.

  Available statistics (admittedly sketchy) indicate that Irish national income rose about 50 percent in the 70 years before WW I, while per capita income more than doubled - the difference influenced by the declining population. Unskilled real wages for both agricultural and urban labor rose approximately 150 percent. Almost all of the gains occurred between 1860 and 1895.
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  However, Irish landlords and capitalists lost heavily due to Irish emigration - providing a partial explanation for the failure of Irish industrialization during that period.
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  In Scandinavia, rates of convergence were much faster than in Ireland, but mass migration was less than that coming from Ireland or Britain. The percentage impact of mass migration on the Scandinavian convergence with the United States is estimated at about one third that for Ireland, and much less for convergence with Britain, which was also an emigrant nation.
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  In the United States, available evidence indicates that immigrants tended to compete for low skilled jobs in slow growth labor intensive established industries in the urban East Coast. This is largely true today, as well, although no longer concentrated in the urban East Coast. By 1910, immigrants and their children accounted for about one quarter of the labor force.
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  Similarly then as now, this occurred as the United States was increasingly exploiting its comparative advantages in resource industries and capital intensive industries requiring skilled labor - thus, then as now, resulting in a substantial widening of inequality.
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  Immigration, then as now, crowded out domestic unskilled workers, widening the gap between the working poor and the rest.

  The authors thus at least recognize that immigration did not have the same impact on skilled and white collar wage rates and middle class living standards as on unskilled wage rates, but omit consideration of upwards labor mobility and whether and to what degree immigration reduced or raised real skilled and white collar wage rates and living standards for the rest of the middle class.

  Throughout the Atlantic economy, recent econometric analyses tend to confirm that mass migration was the predominant factor in pre WW I convergence. This seems to be a reasonable result since the sharpest rates of real wage convergence occurred between the Old World and the New World, while convergence was much lower within the Old World and within the New World, where net migration flows were far less extensive.
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  Also, the sharpest rates of real wage convergence were enjoyed by the nations that enjoyed the greatest rates of emigration, although many of these suffered from slow rates of industrialization. Emigration is estimated to have reduced the European labor force by about 13 percent - 22 percent for the peripheral poor nations.
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  Studies based on GDP aggregates tend to miss much of this convergence impact, because migration disproportionately took away or added to the labor force. Similarly, studies based on closed economy models that omit trade and migration flows, tend to grossly overstate the convergence impact of technological catch up or capital accumulation.

The inequality debate:

 

 





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  Globalization's impact on inequality, both prior to WW I and after WW II, is apparently confirmed by historic studies. As expected by standard economic theory, the two periods of globalization were and are accompanied by rising rates of inequality in the resource rich, labor poor nations of the New World - reduced rates of inequality in most of the participating resource poor, labor rich nations of the Old World - and stable inequality rates in those Old World nations that fell somewhere in the middle of the endowment range. Nonparticipating resource poor, labor rich nations of the Old World - like Spain and Portugal - did not enjoy the declining rates of inequality enjoyed by those that did participate.
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  These conclusions are confirmed by comparing available unskilled real wage statistics with GDP per worker statistics and with farm rents per acre.
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  The authors emphasize the importance of inequality in the globalization debate.

  Unfortunately, they omit the obvious fact that post WW I autarky triumphed even in the resource poor Old World nations where inequality was reduced the most during the pre WW I globalization period. It is thus obvious that protectionism is driven by the particular factors competing with imports - with such arguments as "inequality" advanced predominantly as mere make weights and for the purpose of obtaining political support from broad labor interests.

  The authors also point out the "dismal real wage performance for the less skilled" in the United States after 1973 and especially in the 1980s. They attribute this mostly to declining productivity growth coupled with increasing wage inequality between skills. Increasing levels of inequality were undoubtedly experienced. However again, unfortunately, they omit some obvious factors.

  They omit the inherent inexactness of productivity calculations and measurements of inflation rates. They also omit consideration of the obvious predominant role over all economic phenomena of that period of the inflationary Keynesian policies during the 1970s inflation and stagflation and - during the 1980s - the above average real interest rates incurred during efforts to bring inflation under control. Inflation would tend to increase inequality, and higher interest rates - nominal as well as real - would have a direct negative impact on productivity.

Migration factors predominated over such other factors as trade, schooling and technology - sometimes driving inequality trends in directions opposite to what would have been expected as a result of developments in those other factors.

  The accelerating technological advance in the United States that unevenly increased the productivity of various - predominantly skilled - occupations in the 1970s and 1980s, is noted by the authors. However, it is viewed as unimportant - a "labor demand" factor - compared with the overriding importance of such "labor supply" factors as immigration of predominantly unskilled workers and growing trade deficits from imports of goods produced predominantly by unskilled labor. However, they do consider quite important the extent to which technology replaced unskilled labor ("labor-saving" technology) in the United States, and the extent to which technology enhanced the demand for unskilled labor ("labor-using" technology) in Europe.

  That productivity and living standards during the period after 1973 advanced - even for the unskilled - much faster than indicated by the economic statistics has been convincingly proven by the substantial increases of creature comforts possessed by the working poor as that period progressed.
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  The authors do point out that the beneficiaries of the increasing wage premiums were not only workers with advanced schooling, but also those with age related (job experience) skills. This indicates that upwards mobility was still functioning well for labor, and that the working poor of 1973 were frequently well above that level by 1990 - something that is left unsaid.

  That being said, the authors are obviously correct to conclude that "both trade and immigration increased the supply of unskilled workers relative to skilled workers in the 1980s." Once again, as before WW I - but not to the same extent - migration is apparently a more important factor in wage convergence and divergence than trade.
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  Trade liberalization (globalization)
was an apparently powerful factor for poor peripheral European states in the pre WW I period, with inequality trends substantially correlated to participation in trade liberalization. The record is more ambiguous for the wealthy nations.
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  The authors conclude that migration factors predominated over such other factors as trade, schooling and technology - sometimes driving inequality trends in directions opposite to what would have been expected as a result of developments in those other factors. In particular, while education levels seemed to play a role in superior Scandinavian catch-up and Iberian failure, both Ireland and Italy experienced about average catch-up despite poor educational systems.
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  Restrictions on immigration, according to the authors, were the result of political responses to several factors. Among the most important of these were a perceived decline in the quality of the immigrants, and deteriorating wage conditions in labor markets. They conclude that immigration restraints were an effort by New World political leaders to "defend the economic interests of unskilled labor." This tends to support the argument that growing inequality is a threat to globalization.

  However, another conclusion that can be drawn from these factors is that the business need for continued immigration of unskilled workers declined with the decline in immigrant quality and, especially, with the decline in the wages of domestic unskilled labor. Business interests would not look kindly on substantial growth in public welfare needs arising from the need to care for substantial inflows of unemployed, illiterate immigrants. As the authors note, Old World countries experiencing substantial emigration flows cared not a bit about the increase in inequality caused by their increasing trade restraints.

  The authors warn that current perceptions of widening inequality may cause further restraints on immigration today as they did early in the 20th century.

  However, in the United States, that seems to have been trumped by the growing importance of the Latino vote and the continued need for agricultural workers and other unskilled immigrant workers who - in the welfare state - are needed by business and agricultural interests for jobs not desired by domestic workers. Similar factors are at work in Europe.

  Deglobalization and migration restrictions after WW I were accompanied by dramatic trend reversals, with inequality rising dramatically in poor nations and wealthy but labor abundant European nations, while dropping precipitously in New World nations. Of course, by the 1930s, everybody was equally impoverished by the Great Depression, in which deglobalization played a major role.

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Capital flows:

 

 

 

 

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  International capital flows make "investment demand" a far more important determinant of economic growth than domestic savings, the authors point out. It can accelerate growth in poor economies, facilitate large shifts in the international location of production, stimulate or substitute for trade, and profoundly impact income distribution, the choice of exchange rate regime, and the conduct of macroeconomic policy.
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  Capital flows were enormous prior to WW I. They were much bigger than today. They clearly tended to go where natural resources could be exploited, rather than where cheap labor was located. "Indeed, in the dominant New World destinations, labor was scarce, and immigrants entered in large numbers." Mostly, these capital flows went into government bonds and were used for social overhead investments - railroads, harbors, municipal sewage, telephones, and other infrastructure.
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  Capital market integration became possible within nations and internationally with the arrival of the transatlantic and European cable systems in the middle of the 19th century. The authors conclude that the gold standard - adopted widely in the Atlantic economy during the 1870s - also played a major role in capital market integration. The result was a substantial reduction of borrowing costs and narrowing of comparative borrowing costs in the poorer nations and in the poorer regions within nations.
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  The resulting massive surge in pre WW I capital flows collapsed in the 1920s, and evidence of financial divergence added to the woes of the poorer nations after abandonment of the gold standard in the early 1930s. Capital flows did not really begin to recover - as a percent of GDP - until the middle of the 1970s.

  They did, however, grow nominally with the growth of GDP after WW II.

  Also of great importance, capital market integration within national borders increased in Britain at the end of the 18th century, and in the United States at the end of the 19th century.
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  Direct foreign investment
was about as substantial in the pre WW I period as in the two decades after WW II, but have probably increased in importance since then. The authors point out that the vast majority of foreign direct investments were induced by the desire to locate activities in foreign countries, and also by when it makes sense to conduct such activities through the firm rather than through the market place, such as by licensing agreements. They note the substantial set up costs involved in initial foreign direct investments. Firms that rely heavily on intangible assets, such as goodwill and know how, dominate the ranks of the multinationals.
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  Keynesian macroeconomic views color the authors' explanation for the political backlash against the gold standard and capital market integration. They correctly blame the dynamics of democratic politics and the rise of the political left and trade union power for the retreat into financial autarky, but accept the Keynesian view that this left nations free to use monetary policy to fight unemployment. They accept the notion that nations - especially small nations - must choose between the maximum benefits of foreign trade and the benefits of domestic full employment.

  However, the 1970s demonstrated beyond any doubt that monetary expansion succeeds only as long as currency values can be sustained - that gold and other hard currencies materially assist in maintaining currency values - and that when currencies begin to fall in value, further monetary expansion causes further unemployment along with a host of other inflation ills. Except in the short run - which can be very short indeed for small nations - there is no Keynesian tradeoff between monetary inflation and unemployment. Monetary inflation ultimately becomes a powerful cause of unemployment.
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  With good reason, the authors are unable to point to any small nations that have managed to achieve either full employment or sustained rapid economic growth with a chronically weak currency. Even large nations are unable to succeed with expansive monetary policy once their currencies become chronically weak, as occurred in the United States in the 1970s.
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  The real choice is either the discipline of the gold standard or some other hard currency standard, or the far harsher discipline of raw market forces without the cushion provided by gold or other hard currency reserves. It must be noted that, today, the rigid discipline of the money markets is adhered to in "golden straitjacket" policies of sound money and reasonably balanced budgets which are correctly credited as playing an essential role in the modern surge of economic prosperity. Such policies are precisely those required for success under the gold standard.
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  As for the role of democracy and labor unions and inequality, it must be noted that many authoritarian nations, with no concern over labor sensibilities or inequality, have also favored trade crippling restraints.

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The attraction of "cheap labor:"

  The vast majority of European capital outflows went not to labor-abundant Asia or even to the poorest parts of Europe - as much economic theory would expect. Instead, it predominantly went to resource abundant areas, including the Scandinavian nations and the labor-scarce New World.
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Less efficient technology and infrastructure - lower labor productivity, and exchange rate instability in poor countries - and various other economic and political constraints that raise factor costs - can overcome the attraction of low wage rates.

  Poorly paid labor is not necessarily cheap labor. A direct relationship between investment rates and the costs of capital goods has been demonstrated. Less efficient technology and infrastructure - lower labor productivity - and exchange rate instability in poor countries - and various other economic and political constraints that raise factor costs - can overcome the attraction of low wage rates.
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  For example, using the exact same technology, American and British textile mills competed well with those in Spain, India and China. Workers in those poor nations simply worked much fewer looms and spindles than their British and United States counterparts, although they readily rose to American standards when they migrated to the United States. The cost of mowing an acre of hay was lower in Scotland and England than in Ireland, despite far lower wage rates in Ireland.
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  The adoption of the gold standard or other methods of currency stabilization appears to have played some role in the ability of poor nations to attract capital inflows, but this could be overcome by other factors, as the Argentine experience demonstrated.
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  The Scandinavian nations benefited substantially
from capital inflows. Scholarly studies indicate that capital inflows were responsible for a substantial proportion of their catch-up with wealthier nations. Statistical evidence for the other poor nations is poor, but indicate little if any net capital inflow. The authors conclude that capital inflows made little or no contribution to the growth of the other poor European peripheral nations.
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  The authors conclude that:

  • Despite the above analysis, the reasons why more capital didn't flow to low wage nations remains an "enduring puzzle."
  • Pre WW I capital flows were a force of divergence, not convergence, as - except for the resource rich but low wage Scandinavian nations - they were attracted predominantly to the high wage resource rich New World nations. They were apparently attracted by the same factors as attracted migration flows. However, pre WW I capital flows were attracted mainly to government bonds for construction of "social overhead" - infrastructure projects such as railroads, harbors, and municipal improvements - in localities and nations experiencing heavy net immigration flows attracted by existing high wages.

  The authors do not calculate the extent to which modern capital flows are instead attracted to portfolio or direct business investments unrelated to migration rates and influenced more by business opportunities, legal protections for personnel and assets, and currency stability. They do not here give sufficient emphasis in their conclusions to the role of currency stability in attracting capital inflows or preventing capital flight, although these factors are discussed in earlier segments.

  • Among some (but not all) of the nations where trade restraints were minimal - such as in Ireland and Denmark - the influence of such factors as mass migration, capital flows, schooling, and technological advance accounted for just about all of their substantial success at real wage convergence, with trade accounting for little if any of it. Trade was marginally more important in the other Scandinavian nations. All this means, of course, is that trade benefited all participating nations - regardless of wealth and wage rates - and thus - although contributing massively to convergence of most factor prices - trade sometimes contributed little to convergence of real wages. Trade contributed substantially less than migration flows for those nations heavily impacted by such flows. Migration flows are far less today than before WW I.
  • "The catching up of poor countries with rich may have as much to do with open economy linkages as with any other force identified by growth theory." Free trade may not be enough by itself to achieve real wage convergence, but without it real wage convergence does not occur.
  • Trade can have a dramatic impact on income distribution, even when it comprises a tiny fraction of GDP. This is because of its potentially major impact on various factor prices. However, this impact can vary widely with variances in economic conditions within different nations, so that no general conclusions can be drawn with respect to the impact of trade on income distribution.

  The authors reject both the Marxist explanation of declining domestic investment opportunities and the Hobsonian explanation of excess capital supply due to widening inequality and the resulting excess savings of the wealthy.
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  Scholarly studies indicate that there was little connection between cyclical variations in the savings supply in capital exporting nations and capital outflow rates. Capital outflows declined sharply during booms, when saving rates were highest. Various demand factors seemed to predominate.

  In assessing current globalization prospects, many new or substantially enlarged factors must be taken into account. The vast 20th century growth of the middle class has been repeatedly stressed above. In addition, the major shifts in the relative importance of agricultural, industrial, domestic trade, and services economic segments, and the spread of international financial markets hopefully have changed the dynamic sufficiently to defeat the forces of 21st century autarky. The notable failure of protectionist politics to gain any traction during the 2000 election cycle is a very hopeful sign.

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    Copyright 2001 Dan Blatt