FUTURECASTS online magazine
Vol. 3, No. 3, 3/1/01.
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 authors try to relate the answers to these
questions to current globalization processes and controversy,
especially with respect to the controversy over increasing inequality.
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.
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.
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.
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.
| The political forces that first led to trade
liberalization and then increasingly towards restraints first
on trade and then on migration are covered.
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.
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.
|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.
| 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.
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.
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."
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.
Advances in transportation and communication technology:
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.
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.
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).
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
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.
Winners and losers from trade expansion:
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.
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.)
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
| 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
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.
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.
The inequality debate:
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.
The authors emphasize the importance of inequality in the globalization debate.
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.
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 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.
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.
The authors warn that current perceptions of widening inequality may cause further restraints on immigration today as they did early in the 20th century.
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.
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.
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.
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
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.
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.
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.
The authors conclude that:
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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Copyright © 2001 Dan Blatt