The First Globalization: Understanding Trade, Capital Flows, and Migration (1870-1914), Diapositivas de Historia Económica

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Economic History The First Globalization UC3M 2021 Leonard Kukic lkukic@clio.uc3m.es Big issue • The first globalization period (1870-1914) • What explains it • What were its macroeconomic consequences • What were its distributional consequences What is globalization? • International integration of markets in commodities, labour, and capital • “Law of One Price”: market integration stimulates price convergence in international markets • Creates economic winners, but also economic losers What is globalization? • The first globalization period(1870-1914) • Unprecedented growth in trade, migration, and capital flows • Migration flows large even by present-day standard Trade Value of exported goods as share of GDP Estimates correspond to merchandise export-to-GDP ratios. 25% 24.24% World 20% 15% 10% 5% 0% 1827 1840 1860 1880 1900 1920 1940 1960 1980 2000 2014 Source: Fouquin and Hugot (CEPII 2016) CCcBY Today • Getting the facts right • Trade • The Gold Standard • Migration Why does trade matter? • Increases specialization, and thus efficiency • Bigger market size allows economies of scale • Higher competition and economic efficiency • Easier diffusion of technology Why did trade increase? • Reduced transportation and transaction costs • Steam boats • Railways • Canals • Refrigeration • Telegraph Tariffs USA France ------United Kingdom Le = EA == = sd ES NS 60 o mn o o o o (%) sa3ey Yue a3elany 000Z 066 L 0861 0Z6L 0961 Os6L Ob6L JO£6L 0z6L OL6L 006L 0681 088L 0/8L 1098 L 0S8L 0b8L 0€8L Average Tariff Rates on Total Imports, 1830-2010 Sources: Imlah, Economic Elements Distributional consequences of trade • Trade driven by comparative advantage (Heckscher-Ohlin model) • Comparative advantage depends on factor endowments (land, labour, capital): • When economies become more open, specialise in production using abundant factors • Thus, scarce factor of production in a country loses, while abundant factor of production gains Distributional consequences of trade in Europe • Labour abundant, land scarce • Wages low, rents high • Outcome: • Export manufactured (labour-intensive) goods, import grain • Export people • Eventually, wages increase, rents fall Trade and convergence in grain prices Percent aos 1 20Qliciritrici trios Las sr 1870 1875 1880 1885 1890 1895 1900 1905 1910 —— New York, regression line —— Chicago, regression line —— New York, actual price gap. —— Chicago, actual price gap Figure 3.4 Wheat price differentials: British Price-U.S. Price (percent of U.S. price). Source: Taken from data underlying O'Rourke and Williamson (1994). European Labour • Many 19th Century socialists were pro-free trade • Free trade led to cheaper bread • Benefited the working classes 21 European Land-owners • Demand protection for the price of their output • Land owners have political importance in many continental economies • Grain Invasion leads to agricultural tariffs on the continent 22 A promise te ' 3 DS. $ 8 NE 081895 ¿£29H a Sano lodo) as A] A wonderful idea • “Bringing back the gold standard would be very hard to do, but boy would it be wonderful. We'd have a standard on which to base our money.” • Donald Trump, GQ, Nov. 2015 Why did the Gold Standard matter? • Price stability good for trade and investment • Reduced transaction costs • Eliminated exchange-rate risk • ”Good housekeeping seal of approval” for investment Share of countries on Gold Standard 100 90 80 70 60 50 40 30 20 10 ZI6T OT6T 8061 9061 vo6T z06T 0061 8681 9681 1631 7681 068T 8881 9881 881 7881 0881 8L8T 9L3T vL38T TL8T 0L3T 8981 9981 981 7981 0981 8S8T 958T +vs8T 7581 0s8T How did the Gold Standard work? • Countries required to maintain the fixed exchange rate • Balance of payments (BoP) position critical • Net value of economic transactions of a country with the rest of the world How did the Gold Standard work? • The system ensured an automatic stabilization of currency and BoP position • David Hume (1757) analyzed adjustment process through the price- specie-flow mechanism • Governments can help by playing under “Rules of the Game” The Gold Standard in a nutshell • Un-competitive economies deflate their economies (austerity) • Competitive economies inflate their economies (stimulus) • “The Rules of the Game”: The Central Bank can reinforce adjustment by changing the interest rate for credit The rules of the game Balance of Payments DEFICIT Central Bank INCREASES interest rates Investment FALLS Output FALLS Domestically produced product prices FALL Imports FALL & Exports RISE Balance of Payments return to EQUILIBRIUM Distributional consequences of Gold Standard • The system was intrinsically deflationary (austerity measures) • Cut employment and wages in recessions to maintain capital flows • Negative impact on labour • Low pressure to maintain full employment when workers disenfranchised Immigration flows to the US 1,200,000 E Northern and Western Europe = Africa 1,000,000 7 E Eastern and Southern Europe Asia E E Latin America “9 800,000 2 3 5 600,000 < o 5 400,000 7 «X 200,000 3 EEPSEESSCEETSCCLCESCE S Decade Why did people migrate? • Higher future earnings • Non-pecuniary reasons: personal Wage differentials 180 160 140 USA 120 E Argentina Ireland 100 muk 80 Sweden 60 E Germany = France 40 — a Italy 20 Spain VD LY 5, 1870 1913 Wage-driven migration model Emigration Rate Emigration Relative Relative Low Income constrained by Income Income Difference poverty and differences Differences ignorance (High) (Falling) Time The macroeconomic consequences of migration • Wages of local workers goes down • Wages of foreign workers goes up • Stimulates income convergence between countries Real wages lonvergence in History 0,500 0,450 0,400 0,350 p 0,300 A 0,250 1 0,200 0,150 0,100 0,050 Figure 2.2 —4— C(13) —e— 1(13) —i— MN(15) 18901 1893| 18961 18991 1902( 19051 19081 1911 1 1 + nm o 0 co 0 ro or International real wage dispersion, 1854-1913. Source: Williamson (1995, table A2.1); Globalization Backlash • Globalization created substantial winners • Europeans eat more, better, cheaper grains and meat • Migrants earn higher wages than at home • But it also created losers • Owners of previously scarce resources in both areas: landowners in Europe, low-skill workers in the US • Did this lead to deglobalization, revolution, or war? Economic History Come back next Topic for Globalization Backlash, WWI and the interwar period