World Institute for

Development Economics Research

(UNU/WIDER)

WIDER Annual Lecture 6

Winners and Losers over Two

Centuries of Globalization

Jeffrey G. Williamson

UNU/WIDER gratefully acknowledges sponsorship of the 2002 WIDER

Annual Lecture by the Royal Danish Ministry of Foreign Affairs (Danida)
UNU World Institute for Development Economics Research (UNU/WIDER)
A research and training centre of the United Nations University

The Board of UNU/WIDER

Francois Bourguignon
Ronald Findlay
Nora Lustig
Harris Mutio Mule
Deepak Nayyar, Chairperson
Jukka Pekkarinen
Vladimir Popov

Ex Officio

Hans J. A. van Ginkel, Rector of UNU

Anthony F. Shorrocks, Director of UNU/WIDER

UNU World Institute for Development Economics Research (UNU/WIDER) was established by the
United Nations University as its first research and training centre and started work in Helsinki,
Finland in 1985. The purpose of the Institute is to undertake applied research and policy analysis on
structural changes affecting the developing and transitional economies, to provide a forum for the
advocacy of policies leading to robust, equitable and environmentally sustainable growth, and to
promote capacity strengthening and training in the field of economic and social policy making. Its
work is carried out by staff researchers and visiting scholars in Helsinki and through networks of
collaborating scholars and institutions around the world.

UNU World Institute for Development Economics Research (UNU/WIDER)

Katajanokanlaituri 6 B
00160 Helsinki, Finland

Copyright ã UNU/WIDER

Camera-ready typescript prepared by Lorraine Telfer-Taivainen at UNU/WIDER

Printed at Hakapaino Oy, Helsinki

The views expressed in this publication are those of the author(s). Publication does not imply endorsement by the
Institute or the United Nations University of any of the views expressed.

ISSN 1455-3082
ISBN 92-9190-310-8 printed version
ISBN 92-9190-311-6 internet version
 CONTENTS

CONTENTS iii

LIST OF TABLES AND FIGURES v

FOREWORD vi

AUTHOR’S ACKNOWLEDGEMENTS vii

ABOUT THE AUTHOR viii

I INTRODUCTION 1

II GLOBALIZATION AND WORLD INEQUALITY 1

III MAKING A WORLD ECONOMY 3

3.1 Epoch I: Anti-global mercantilist restriction 1492-1820 3
3.2 Epoch II: The first global century 1820-1913 5
3.3 Epoch III: Beating an anti-global retreat 1913-50 7
3.4 Epoch IV: The second global century 1950-2002 7
IV DID THE SECOND GLOBAL CENTURY MAKE THE WORLD
MORE UNEQUAL? 8
4.1 International income gaps: a postwar epochal turning point? 8
4.2 Trade policy and international income gaps: late twentieth century
conventional wisdom 8
4.3 When the twentieth century leader went open: the United States 10
4.4 Globalization, inequality and the OECD 11
4.5 Globalization, inequality and the Third World 12
4.6 Border effects, limited access and the Third World 13
V DID THE FIRST GLOBAL CENTURY MAKE THE WORLD
MORE UNEQUAL? 14
5.1 Global divergence without globalization 14
5.2 When the nineteenth century leader went open: Britain 15
5.3 European followers and the New World 16
5.4 Terms of trade gains in the periphery before 1913 18
5.5 Rising inequality in the primary product exporting periphery 21
5.6 North-North and South-South mass migrations, with segmentation in
between 21

iii
 5.7 The unimportance of global capital markets 24
5.8 Trade policy and international income gaps:
Why the big regime switch? 26
5.9 Trade policy and international income gaps:
What about the pre-1940 periphery? 27
5.10 Lessons of history I:
Will there be South-North mass migration in our future? 29
5.11 Lessons of history II:
Absolute or relative income? Nominal or real income? 31
5.12 Lessons of history III:
Accommodating the losers with safety nets and suffrage 33
5.13 Lessons of history IV: Why do countries protect? 34
REFERENCES 36

iv
 LIST OF TABLES AND FIGURES

Table 1: Trade-policy orientation and growth rates in the Third World, 1963-92 10
Table 2: Wealth bias during the two global centuries 25
Table 3: Tariff impact of GDP per capita growth by region 28

Figure 1: Global inequality of individual incomes, 1820-1992 2

Figure 2: Explaining the European trade boom, 1500-1800 4
Figure 3: Average world tariffs before World War II 6
Figure 4: Initial real wage versus subsequent inequality trends 1870-1913 17
Figure 5: Unweighted average of regional tariffs before World War II 17
Figure 6: Real wage dispersion in the Atlantic economy 1854-1913 22

v
 FOREWORD

The WIDER Annual Lecture is one of the major events in UNU/WIDER’s calendar of
activities, providing an opportunity for a distinguished speaker to present their analysis and
views on a topic related to WIDER’s work on developing countries and nations in transition. I
am delighted that Professor Jeffrey Williamson of Harvard University accepted the invitation
to deliver the 2002 Annual Lecture. The talk, entitled ‘Winners and Losers in Two Centuries
of Globalization’, took place at the University of Copenhagen on 5 September 2002. We are
grateful to the Danish Ministry of Foreign Affairs for sponsoring the meeting and to the
University of Copenhagen for hosting the event.

Jeffrey Williamson is renowned as both an exemplary teacher and an outstanding scholar of

economic history. His work has covered—and continues to cover—a wide range of historical
and contemporary topics, including growth, trade, migration, living standards and inequality.
All these themes are prominent in this lecture, which offers a broad perspective on the global
impact of trade and factor flows over many centuries.

He begins by noting that while world inequality has been trending upwards for most of the
past 500 years, ‘globalization’—which he defines in terms of commodity price convergence
across regions of the world—only began around 1820. During the ‘first global century’ up to
1913, lower transport costs and tariffs stimulated trade, which together with relatively free
factor mobility created powerful egalitarian forces on a world scale. However, as Williamson
stresses, not everyone stood to benefit from a continuation of these policies and the period
from 1913-50 was characterized by an anti-globalization backlash under which restrictions on
migration and rising tariffs resulted in price divergence across countries.

The period from 1950 until the present day constitutes the second globalization era. It differs,
however, from the first global century in one important respect—the mass labour migrations
that were the main globalization force in the nineteenth century have been replaced by
immigration controls, leaving trade (aided by tariff reductions) as the principal source of
international price convergence.

In weaving together the economic, political and demographic factors which help to explain the
pattern of living standards across countries and over time, Williamson draws heavily on his
past work with a variety of coauthors. Readers will be impressed by the breadth of his vision,
the detailed evidence offered in support of his views, and the important implications that
follow for the way in which the world is likely to develop over the next half century.

Anthony Shorrocks
Director, UNU/WIDER
Helsinki, October 2002

vi
 AUTHOR’S ACKNOWLEDGEMENTS

This is the revised version of a paper delivered as the 2002 WIDER Annual Lecture, in
Copenhagen on 5 September 2002. The research reported here draws heavily on recent
collaborations with Michael Clemens, John Coatsworth, Tim Hatton, Kevin O’Rourke,
and especially Peter Lindert. I am grateful to all five. I also acknowledge the wonderful
reception offered by my Danish hosts, as well as the help of WIDER organizers
Barbara Fagerman and Tony Shorrocks. Finally, I am grateful for financial support
from the National Science Foundation SES-0001362.

vii
 ABOUT THE AUTHOR

Professor Williamson is the Laird Bell

Professor of Economics and Faculty
Fellow at the Center for International
Development at Harvard University. He is
also Research Associate at the National
Bureau of Economic Research. Born a
New Englander in 1935, Professor
Williamson received his PhD from
Stanford University in 1961. He then
taught at the University of Wisconsin for
twenty years before joining the Harvard
faculty in 1983. The author of more than
twenty scholarly books and almost two
hundred articles on economic history,
international economics and economic
development, Professor Williamson has
served as President of the Economic
History Association (1994-5), Chairman
of the Economics Department at Harvard
(1997-2000), and Master of Mather House
at Harvard (1986-93). His most recent
books include The Age of Mass Migration (Oxford 1998, with T. Hatton), Growth,
Inequality, and Globalization (Mattioli Lectures: Cambridge 1998, with P. Aghion),
Globalization and History (MIT 1999, with K. O’Rourke) and Globalization in
Historical Perspective (Chicago and NBER 2002, with M.D. Bordo and A.M. Taylor).
He is currently doing research on world migration issues and on the globalization
agenda dealing with the Third World raised by W. Arthur Lewis and other
development giants decades ago, including deindustrialization and reindustrialization.

viii
 I INTRODUCTION

The world has seen two globalization booms over the past two centuries, and one bust.
The first global century ended with World War I and the second started at the end of
World War II, while the years in between were ones of anti-global backlash. This
lecture reports what we know about the winners and losers during the two global
centuries, including aspects almost always ignored in modern debate—how prices of
consumption goods on the expenditure side are affected, and how the economic
position of the poor is influenced. It also reports two responses of the winners to the
losers’ complaints. Some concessions to the losers took the form of anti-global policy
manifested by immigration restriction in the high-wage countries and trade restriction
pretty much everywhere. Some concessions to the losers were also manifested by a
‘race towards the top’ whereby legislation strengthened losers’ safety nets and
increased their sense of political participation. The lecture concludes with four lessons
of history and an agenda for international economists, including more attention to the
impact of globalization on commodity price structure, the causes of protection, the
impact of world migration on poverty eradication, and the role of political participation
in the whole process.

II GLOBALIZATION AND WORLD INEQUALITY

Globalization in world commodity and factor markets has evolved in fits and starts
since Columbus and de Gama sailed from Europe more than 500 years ago. This
lecture begins with a survey of this history so as to place contemporary events in better
perspective. It then asks whether globalization raised world inequality. This question
can be split into two more: What happened to income gaps between nations? What
happened to income gaps within nations? Collaborative work with Peter Lindert
stresses the question about world inequality (Lindert and Williamson 2002a, 2002b),
but this lecture stresses the second two questions, the reason being that answers to
these have more relevance for policy and for the ability of a globally integrated world
to survive. Indeed, at various points in the lecture, I ask when there has been global
backlash in the past—driven by complaints of the losers, and whether and how the
complaints of the losers were accommodated by the winners. Finally, this lecture also
stresses the contribution of world migration to poverty eradication.

1
FIGURE 1: GLOBAL INEQUALITY OF INDIVIDUAL INCOMES, 1820-1992

Source: adapted from Bourguignon and Morrisson (2000). The ‘countries’ here consist of 15 single countries with
abundant data and large populations plus 18 other country groups. The 18 groups were aggregates of
geographical neighbors having similar levels of GDP per capita, as estimated by Maddison (1995).

Recent scholarship has documented a dramatic divergence in incomes around the globe
over the past two centuries. Furthermore, all of this work shows that the divergence
was driven overwhelmingly by the rise of between-nation inequality, not by the rise of
inequality within nations (Berry et al. 1991; Maddison 1995; Pritchett 1997;
Bourguignon and Morrisson 2000; Dowrick and DeLong 2002). Figure 1 uses the work
of François Bourguignon and Christian Morrisson to summarize these trends, and it
confirms that changing income gaps between countries explains changing world
inequality. However, the fact that the rise of inequality within nations has not driven
the secular rise in global inequality hardly implies that it has been irrelevant, and for
two reasons. First, policy is formed at the country level, and it is changing income
distribution within borders that usually triggers political complaint and policy
responses; and second, it is the political voice of the losers that matters, and they can
be at the top, the bottom, or the middle of that distribution. Furthermore, the absence of
a net secular change in within-country inequality at the global level may simply reveal
an equilibrium process whereby rising within-country inequality breeds policy
responses that force the distribution back to some culturally acceptable steady state.
That level may be far higher for the United States than for Japan, to take two modern
economic giants as examples. I start by decomposing the centuries since 1492 into four
distinct globalization epochs. Two of these were pro-global, and two were anti-global. I
then explore whether the two pro-global epochs made the world more unequal, and
whether it produced backlash.

2
 III MAKING A WORLD ECONOMY

3.1 Epoch I: Anti-global mercantilist restriction 1492-1820

The Voyages of Discovery induced a transfer of technology, plants, animals and

diseases on an enormous scale, never seen before and maybe since. But the impact of
Columbus and da Gama on trade, factor migration and globalization was a different
matter entirely. For globalization to have an impact on relative factor prices, absolute
living standards and GDP per capita, domestic relative commodity prices and/or
relative endowments must be altered. True, there was a world trade boom after 1492,
and the share of trade in world GDP increased markedly (O’Rourke and Williamson
2002a). But was that trade boom explained by declining trade barriers and global
integration? A pro-global decline in trade barriers should have left a trail marked by
falling commodity price gaps between exporting and importing trading centers, but
there is absolutely no such evidence (O’Rourke and Williamson 2002b). Thus,
‘discoveries’ and transport productivity improvements must have been offset by
trading monopoly markups, tariffs, non-tariff restrictions, wars, and pirates, all of
which served in combination to choke off trade.

Since there is so much confusion in the globalization debate about its measurement, it
might pay to elaborate on this point. Figure 2 (taken from O’Rourke and Williamson
2002a) presents a stylized view of post-Colombian trade between Europe and the rest
of the world (the latter denoted by an asterisk). MM is the European import demand
function (that is, domestic demand minus domestic supply), with import demand
declining as the home market price (p) increases. SS is the foreign export supply
function (foreign supply minus foreign demand), with export supply rising as the price
abroad (p*) increases. In the absence of transport costs, monopolies, wars, pirates, and
other trade barriers, international commodity markets would be perfectly integrated:
prices would be the same at home and abroad, determined by the intersection of the
two schedules. Transport costs, protection, war, pirates, and monopoly drive a wedge
(t) between export and import prices: higher tariffs, transport costs, war embargoes and
monopoly rents increase the wedge while lower barriers reduce it. Global commodity
market integration is represented in Figure 2 by a decline in the wedge: falling
transport costs, falling trading monopoly rents, falling tariffs, the suppression of
pirates, or a return to peace all lead to falling import prices in both places, rising export
prices in both places, an erosion of price gaps between them, and an increase in trade
volumes connecting them.

3
FIGURE 2: EXPLAINING THE EUROPEAN TRADE BOOM, 1500-1800

Source: adapted from O'Rourke and Williamson (2002a: Figure 3).

The fact that trade should rise as trade barriers fall is, of course, the rationale behind
using trade volumes or the share of trade in GDP as a proxy for international
commodity market integration. Indeed, several authors have used Angus Maddison’s
(1995) data to trace out long-run trends in commodity market integration since the
early nineteenth century, or even earlier (e.g. Hirst and Thompson 1996; Findlay and
O’Rourke 2002). However, Figure 2 makes it clear that global commodity market
integration is not the only reason why the volume of trade, or trade’s share in GDP,
might increase over time. Just because we see a trade boom doesn’t necessarily mean
that more liberal trade policies or transport revolutions are at work. After all, outward
shifts in either import demand (to MM’) or export supply (to SS’) could also lead to
trade expansion, and such shifts could occur as a result of population growth, the
settlement of previously unexploited frontiers, capital accumulation, technological
change, a shift in post-Colombian income distribution favoring those who consume
imported ‘exotic’ luxuries, and a variety of other factors. Thus, Figure 2 argues that the
only irrefutable evidence that global commodity market integration is taking place is a
decline in the international dispersion of commodity prices, or what I call commodity
price convergence. However, we cannot find it (O’Rourke and Williamson 2002b).

If it was not declining trade barriers that explains the world trade boom after
Columbus, what was it? Just like world experience from the 1950s to the 1980s (Baier
and Bergstrand 2001), it appears that European income growth—or growth of incomes
of the landed rich—might have explained as much as two thirds of the trade boom over

4
the three centuries as a whole (O’Rourke and Williamson 2002a).1 The world trade
boom after Columbus would have been a lot bigger without those anti-global
interventions. And labor migration and capital flows were, of course, only a trickle.

3.2 Epoch II: The first global century 1820-1913

The 1820s were a watershed in the evolution of the world economy. International
commodity price convergence did not start until then. Powerful and epochal shifts
towards liberal policy (e.g. dismantling mercantilism) were manifested during that
decade. In addition, the 1820s coincide with the peacetime recovery from the
Napoleonic wars on the continent, launching a century of global pax Britannica.2 In
short, the 1820s mark the start of a world regime of globalization.

Transport costs dropped very fast in the century prior to World War I. These
globalization forces were powerful in the Atlantic economy, but they were partially
offset by a rising tide of protection. Declining transport costs accounted for two-thirds
of the integration of world commodity markets over the century following 1820, and
for all of world commodity market integration in the four decades after 1870, when
globalization backlash offset some of it (Lindert and Williamson 2002a). The political
backlash of the late nineteenth century and interwar period was absent in Asia and
Africa—partly because these regions contained colonies of free trading European
countries, partly because of the power of gunboat diplomacy, and partly because of the
political influence wielded by natives who controlled the natural resources that were
the base of their exports. As a result, the globalization-induced domestic relative price
shocks were even bigger and more ubiquitous in Asia and Africa than those in the
Atlantic economy (Williamson 2002). To put it another way, commodity price
convergence between the European industrial core and the periphery was even more
dramatic than it was within the Atlantic economy. In short, the liberal dismantling of
mercantilism and the worldwide transport revolution worked together to produce truly
global commodity markets across the nineteenth century. The persistent decline in
transport costs worldwide allowed competitive winds to blow hard where they had
never blown before. True, there was an anti-global policy reaction after 1870 in the
European center but it was nowhere near big enough to cause a return to the pre-1820
levels of economic isolation. On the other hand, these globalization events were met

1 The causality is worth stressing here. While the modern globalization-inequality debate chases the causation
from globalization to within-country inequality, the period 1500-1800 was characterized by population pressure
on the land which raised land rents and thus the incomes of Europe’s rich. Rising inequality increased the
demand for imported luxuries, causing a trade boom. It also caused a boom in all well-placed European ports
around the Atlantic economy. It seems to me that a recent paper by Acemoglu, Johnson and Robinson (2002) has
the causality wrong.
2 For an excellent survey, see Findlay and O’Rourke (2002).

5
with rising levels of protection in Latin America, the United States, and the European
periphery, and to very high levels, as Figure 3 documents. However, I postpone until
the end of this lecture the question as to whether it was globalization backlash that
triggered protection in the periphery or whether it was something else. If history is to
offer any lessons for the present, we had better get the causes of backlash straight.
FIGURE 3: AVERAGE WORLD TARIFFS BEFORE WORLD WAR II

Source: adapted from Coatsworth and Williamson (2002: Figure 1).

Factor markets also became more integrated worldwide. As European investors came
to believe in strong growth prospects overseas, global capital markets became steadily
more integrated, reaching levels in 1913 that may not have been regained even today
(Clemens and Williamson 2001b; Obstfeld and Taylor 2002). International migration
soared in response to unrestrictive immigration policies and falling steerage costs
(Hatton and Williamson 1998; Chiswick and Hatton 2002), but not without some
backlash: New World immigrant subsidies began to evaporate toward the end of the
century, political debate over immigrant restriction became very intense, and, finally,
the quotas were imposed. In this case, it is clear that the retreat from open immigration
policies to quotas was driven by complaints from the losers at the bottom of the income
pyramid, the unskilled native born (Goldin 1994; Timmer and Williamson 1998;
Williamson 1998; Chiswick and Hatton 2002).

6
3.3 Epoch III: Beating an anti-global retreat 1913-50

The globalized world started to fall apart after 1913, and it was completely dismantled
between the wars. New policy barriers were imposed restricting the ability of poor
populations to flee miserable conditions for something better, barriers that still exist
today, a century later. Thus, the foreign-born share in the United States population fell
from a pre-1913 figure of 14.6 percent to an interwar figure of 6.9 percent. Higher
tariffs and other non-tariff barriers choked off the gains from trade. Thus, barrier-
ridden price gaps between Atlantic economy trading partners doubled, returning those
gaps to 1870 levels (Lindert and Williamson 2002a: Table 1; Findlay and O’Rourke
2002). The appearance of new disincentives reduced investment in the diffusion of new
technologies around the world, and the share of foreign capital flows in GDP dropped
from 3.3 to 1.2 percent (Obstfeld and Taylor 1998: 359). In short, the interwar retreat
from globalization was carried entirely by anti-global economic policies.

3.4 Epoch IV: The second global century 1950-2002

Globalization by any definition resumed after World War II. It has differed from pre-
1914 globalization in several ways (Baldwin and Martin 1999). Most important by far,
factor migrations are less impressive: the foreign born are a much smaller share in
labor-scarce economies than they were in 1913, and capital exports are a smaller
percentage of GDP in the postwar United States (0.5 percent in 1960-73 and 1.2
percent 1989-96: Obstfeld and Taylor 1998: Table 11.1) than they were in prewar
Britain (4.6 percent in 1890-1913). On the other hand, trade barriers are probably lower
today than they were in 1913. These differences are tied to policy changes in one
dominant nation, the United States, which has switched from a protectionist welcoming
immigrants to a free trader restricting their entrance.

Ever since Eli Hecksher and Bertil Ohlin wrote almost a century ago (Flam and
Flanders 1991), their theory has taught that trade can be a substitute for factor
migration. While modern theory is much more ambiguous on this point, history is not.
In the first global century, before quotas and restrictions, factor mobility had a much
bigger impact on factor prices, inequality, and poverty than did trade (Taylor and
Williamson 1997). Perhaps this explains why the second global century has been much
more enthusiastic about commodity trade than about migration. In any case, I start with
the more recent globalization experience, the second global century.

7
 IV DID THE SECOND GLOBAL CENTURY MAKE THE WORLD
MORE UNEQUAL?

4.1 International income gaps: a postwar epochal turning point?

The Bourguignon and Morrisson evidence in Figure 1 documents what looks like a mid
twentieth century turning point in their between-country inequality index, since its rise
slows down after 1950. However, the Bourguignon and Morrisson long-period data
base contains only 15 countries. Using postwar purchasing-power-parity data for a
much bigger sample of 115, Arne Melchior, Kjetil Telle and Henrik Wiig (2000)
actually document a decline in their between-country inequality index in the second
half of the twentieth century, and Xavier Sala-i-Matin (2002) shows the same when
focusing on poverty.3 The first three authors document stability in between-country
inequality up to the late 1970s, followed by convergence. Four other studies find the
same fall in between-country inequality after the early 1960s (Schultz 1998; Firebaugh
1999; Boltho and Toniolo 1999; Radetzki and Jonsson 2000).4 Among these recent
studies, perhaps the most useful in identifying an epochal regime switch is that of
Andrea Boltho and Gianni Toniolo (1999), who show a rise in between-country
inequality in the 1940s, rough stability over the next three decades, and a significant
fall after 1980, significant enough to make their between-country inequality index drop
well below its 1950 level. Did the postwar switch from autarky to global integration
contribute to this epochal change in the evolution of international gaps in average
incomes?

4.2 Trade policy and international income gaps: late twentieth century
conventional wisdom

Conventional (static) theory argues that trade liberalization should have benefited
Third World countries more than it benefited leading industrial countries. After all,
trade liberalization should have a bigger effect on the terms of trade of countries
joining the larger integrated world economy than on countries already members.5 And
the bigger the terms of trade gain, the bigger the GDP per capita gain.

3 This benign interpretation certainly has its critics, most recently from the World Bank itself (Milanovic 2002).
4 They all use purchasing-power-parity data for which the fall is far clearer. Indeed, it disappears in studies that
use income data in US dollars (Melchior, Telle and Wiig 2000: 16).
5 For example, when Mexico joined NAFTA in 1994, its economy was only about 6 percent the size of the
United States. Furthermore, only about 9 percent of US trade was with Mexico, while about 75 percent of
Mexican imports and 84 percent of Mexican exports involved the US (Robertson 2001:1). These shares suggest
that Mexico satisfied the ‘small country assumption’ and took North American market prices as given, thus
getting the full measure of terms of trade gains by going open.

8
So much for theory. Reality suggests the contrary. After all, the postwar trade that was
liberalized the most was in fact intra-OECD trade, not trade between the OECD and the
rest. From the very beginning in the 1940s, the General Agreement on Tariffs and
Trade explicitly excused low-income countries from the need to dismantle their import
barriers and exchange controls. This GATT permission served to lower GDP in low-
income countries below what might have been, but the permission was consistent with
the anti-global ideology prevailing in previously colonial Asia and Africa, in Latin
America where the great depression hit so hard, and in Eastern Europe dominated as it
was by state-directed USSR. Thus the succeeding rounds of liberalization over the first
two decades or so of GATT brought freer trade and gains from trade mainly to OECD
members. However, these facts do not suggest that late twentieth century globalization
favored rich countries. Rather, they suggest that globalization favored all (rich
industrial) countries who liberalized and penalized those (poor preindustrial) who did
not. There is, of course, an abundant empirical literature showing that liberalizing
Third World countries gained from freer trade after the OECD leaders set the liberal
tone, after the 1960s.

First, the authors of a large National Bureau of Economic Research project assessed
trade and exchange control regimes in the 1960s and 1970s by making classic partial-
equilibrium calculations of deadweight losses (Bhagwati and Krueger 1973-6). They
concluded that the barriers imposed significant costs in all but one case. However,
these welfare calculations came from standard models which did not allow protection a
chance to lower long-run cost curves as would be true of the traditional infant industry
case, or to foster industrialization and thus growth, as would be true of those modern
growth models where industry is the carrier of technological change and capital
deepening. Thus, economists have looked for more late twentieth century proof to
support the openness-fosters-growth hypothesis.

Second, analysts have contrasted the growth performance of relatively open with
relatively closed economies. The World Bank has conducted such studies for 41 Third
World countries going back before the first oil shock. The correlation between trade
openness and growth is abundantly clear in these studies, as illustrated in Table 1. Yet,
such analysis is vulnerable to the criticism that the effect of trade policies alone cannot
be isolated since other policies usually change at the same time. Thus, countries that
liberalized their trade also liberalized their domestic factor markets, liberalized their
domestic commodity markets, and set up better property rights enforcement. The
appearance of these domestic policies may deserve more credit for raising income
while the simultaneous appearance of more liberal trade policies may deserve less.

9
Third, there are country event studies, where the focus is on periods when Third World
trade policy regimes change dramatically enough to see their effect on growth. For
example, Anne Krueger (1983, 1984) looked at trade opening moments in South Korea
around 1960, Brazil and Colombia around 1965, and Tunisia around 1970. Growth
improved after liberalization in all four cases. More recently, David Dollar and Aart
Kraay (2000a) examined the reforms and trade liberalizations of 16 countries in the
1980s and 1990s, finding, once again, the positive correlation between freer trade and
faster growth. Of course, these reform episodes may have changed more than just
global participation, so that an independent trade effect may not have been isolated.
TABLE 1: TRADE-POLICY ORIENTATION AND GROWTH RATES IN THE THIRD
WORLD, 1963-92
Average annual rates growth of GDP per capita (%)

Trade policy orientation 1963-73 1973-85 1980-92

Strongly open to trade 6.9 5.9 6.4

Moderately open 4.9 1.6 2.3
Moderately anti-trade 4.0 1.7 -0.2
Strongly anti-trade 1.6 -0.1 -0.4
Sources and notes: adapted from Lindert and Williamson (2002a: Table 3) based on World Bank data. In all
periods the three strongly open economies were Hong Kong, South Korea, and Singapore. The identities of the
strongly anti-trade countries changed over time. In 1963-73, they were Argentina, Bangladesh, Burundi, Chile,
Dominican Republic, Ethiopia, Ghana, India, Pakistan, Peru, Sri Lanka, Sudan, Tanzania, Turkey, Uruguay, and
Zambia. For the two overlapping later periods, the strongly anti-trade countries were the previous sixteen, plus
Bolivia, Madagascar, and Nigeria, minus Chile, Pakistan, Sri Lanka, Turkey, and Uruguay.

Fourth, macroeconometric analysis has been used in an attempt to resolve the doubts
left by simpler historical correlations revealed by the other three kinds of studies. This
macroeconometric literature shows that free trade policies have had a positive effect on
growth in the late twentieth century, especially with many other relevant influences
held constant. The most famous of these is by Jeffrey Sachs and Andrew Warner
(1995), but many others have also confirmed the openness-fosters-growth hypothesis
for the late twentieth century (e.g. Dollar 1992; Edwards 1993; Dollar and Kraay
2000a).6 In spite of this evidence, it must be said that there are still some skeptics who
doubt that support for the openness-fosters-growth hypothesis is unambiguous, of
which more later.

4.3 When the twentieth century leader went open: the United States

The recent American surge in wage and income inequality generated an intense search
for its sources. First, there were the globalization sources. These included the rise in

6 For an excellent critical survey, see Dowrick and DeLong (2002).

10
unskilled worker immigration rates, due to rising foreign immigrant supplies and to a
liberalization of United States immigration policy. Increasing competition from
imports that used unskilled labor intensively was added to the globalization impact, a
rising competition due to foreign supply improvements (aided by US outsourcing),
international transportation improvements, and trade liberalizing policies. Second,
there were sources apparently unrelated to globalization, like a slowdown in the growth
of per worker skill supply and biased technological change that cut the demand for
unskilled workers relative to skilled workers.

The debate evolved into a ‘trade versus technology’ contest, although it might have
learned far more by greater attention to immigration and skills (or schooling) supply,
and by attention to the century before the 1970s. Some contestants agree with Adrian
Wood (1994, 1998) that trade was to blame for much of the wage widening. Others
contestants reject this conclusion, arguing that most or all of the widening was due to a
shift in technology that has been strongly biased in favor of skills. Most estimates tend
to resemble the guess by Feenstra and Hanson (1999) that perhaps 15-33 percent of the
rising inequality was due to trade competition. Still, everyone seems to agree that going
open in late twentieth century was hardly egalitarian for America.

William Cline offers the boldest attempt at an overall quantitative accounting of these
potential sources. Cline blames globalization less than do Feenstra, Hanson and most
other writers, and concludes that skill-biased technological change is bigger than any
globalization effect (Cline 1997: Table 5.1). Cline’s interpretation of his own estimates
is, however, very different from mine, and perhaps my longer historical perspective
accounts for the difference. The proper question, it seems to me, is left unasked by
Cline and other economists in the debate, namely, ‘how did the period 1973-93 differ
from the one that preceded it, 1953-73’? If the other sources added up to pretty much
the same impact in the first postwar period, then it would be the change in
globalization forces between the two periods that mattered. Thus, it seems to me that
Cline’s study illustrates how economists throw away information by confining their
analysis to the recent widening of wage gaps. When the world economy became
increasingly integrated in the two centuries before 1980, technology also had its factor
bias, and the mismatch between technological bias and skills growth kept shifting, with
inequality implications (Williamson and Lindert 1980; Goldin and Katz 1999, 2000;
Lindert 2000; Lindert and Williamson 2002). Why ignore this history?

4.4 Globalization, inequality and the OECD

The United States wasn’t the only OECD country to undergo a recent rise in inequality.
The trend toward wider wage gaps has also been unmistakable in Britain. Although
there wasn’t much widening in full-time labor earnings for France or Japan, and none

11
at all for Germany or Italy, income measures that take work hours and unemployment
into account reveal some widening even in those last four cases. A recent study
surveyed the inequality of disposable household income in the OECD since from the
mid 1970s (Burniaux et al. 1998). Up to the mid 1980s, the Americans and British
were alone in having a clear rise in inequality. From the mid 1980s to the mid 1990s,
however, 20 out of 21 OECD countries had a noticeable rise in inequality.
Furthermore, the main source of rising income inequality after the mid 1980s was the
widening of labor earnings. The fact that labor earnings became more unequal in most
OECD countries, when full-time labor earnings did not, suggests that many countries
took their inequality in the form of more unemployment and hours reduction, rather
than in wage rates.

4.5 Globalization, inequality and the Third World

The sparse literature on the wage inequality and trade liberalization connection in
developing countries is mixed in its findings and narrow in its focus. Until recently, it
had concentrated on six Latins (Argentina, Chile, Colombia, Costa Rica, Mexico, and
Uruguay) and three East Asians (Korea, Singapore, and Taiwan), and the assessment
diverged sharply between regions and epochs. Wage gaps seemed to fall when the
three Asian tigers liberalized in the 1960s and early 1970s. Yet wage gaps generally
widened when the six Latin American countries liberalized after the late 1970s (Wood
1994, 1997, 1998; Robbins 1997; Robbins and Gindling 1999; Hanson and Harrison
1999). Why the difference?

As Adrian Wood (1997) has rightly pointed out, historical context was important, since
other things were not equal during these liberalizations. The clearest example where a
Latin wage widening appears to refute the egalitarian Stolper-Samuelson prediction
was the Mexican liberalization under Salinas in 1985-1990. Yet this pro-global
liberalization move coincided with the major entry of China and other Asian exporters
into world markets. Thus Mexico faced intense new competition from less skill-
intensive manufactures in all export markets. Historical context could also explain why
trade liberalization coincided with wage widening in the five other Latin countries, and
why it coincided with wage narrowing in East Asia in the 1960s and early 1970s.
Again, timing matters. Competition from other low-wage countries was far less intense
when the Asian tigers pulled down their barriers in the 1960s and early 1970s
compared with the late 1970s and early 1980s when the Latin Americans opened up.

But even if these findings were not mixed, they could not have had a very big impact
on global inequalities. After all, the literature has focused on nine countries that
together had less than 200 million people in 1980, while China by itself had 980
million, India 687 million, Indonesia 148 million, and Russia 139 million. All four of

12
these giants recorded widening income gaps after their economies went global. The
widening did not start in China until after 1984, because the initial reforms were rural
and agricultural and therefore had an egalitarian effect. When the reforms reached the
urban industrial sector, China’s income gaps began to widen (Griffin and Zhao 1993:61
especially; Atinc 1997). India’s inequality has risen since liberalization started in the
early 1990s. Indonesian incomes became increasingly concentrated in the top decile
from the 1970s to the 1990s, though this probably owed more to the Suharto regime’s
ownership of the new oil wealth than to any conventional trade-liberalization effect.
Russian inequalities soared after the collapse of the Soviet regime in 1991, and this
owed much to the handing over of trading prerogatives and assets to a few oligarchs
(Flemming and Micklewright 2000).

4.6 Border effects, limited access and the Third World

Income widening in these four giants dominates global trends in within-country

inequality,7 but how much was due to liberal trade policy and globalization? Probably
very little. Indeed, much of the inequality surge during their liberalization experiments
seems linked to the fact that the opening to trade and foreign investment was
incomplete and selective. That is, the rise in inequality appears to have been based on
the exclusion of much of the population from the benefits of globalization. The
question is what accounts for the exclusion? China, where the gains since 1984 have
been so heavily concentrated in the coastal cities and provinces (Griffin and Zhao
1993; Atinc 1997), offers a good example. Those that were able to participate in the
new, globally-linked economy prospered faster than ever before, while the rest in the
hinterland were left behind,8 or at least enjoyed less economic success. China’s
inequality had risen to American levels by 1995 (a gini of .406), but the pronounced
surge in inequality from 1984 to 1995 was dominated by the rise in urban-rural and
coastal-hinterland gaps, not by widening gaps within any given locale. This pattern
suggests that China’s inequality—like that of Russia, Indonesia and other giants—has
been raised by differential access to the benefits of the new economy, not by widening
gaps among those who participate in it, or among those who do not. But why have the
globalization-induced growth shocks favored China’s coastal provinces? How much is
due to policy, and how much to border effects associated with external trade, effects
that have favored the coastal provinces for centuries?

7 The giants also dominate trends in between-country inequality. Much of the fall in the between-country
inequality index offered by Melchior, Telle and Wiig (2000:15) is due to the fact that the populations in Japan
and the US are getting relatively fewer and less rich, while those in China and India are getting richer and more
populous.
8 Migration from the hinterland to the cities was pretty much prohibited before the mid 1990s.

13
Consider another example. In the aftermath of GATT-related liberalization in 1986 and
of NAFTA-related liberalization in 1994, Mexico has undergone rising inequality, not
falling inequality as most observers predicted. However, Gordon Hanson (2002) has
shown that much of this result can be traced to an uneven regional stimulus and, in
particular, to the boom along the US border. Is it only a matter of waiting for these
‘border effects’ to spread? Apparently, since Raymond Robertson (2001) has shown
that the Stolper-Samuelson predictions work just fine for Mexico after 1994, if one
allows for a reasonable three to five year lag.

V DID THE FIRST GLOBAL CENTURY MAKE THE WORLD

MORE UNEQUAL?

5.1 Global divergence without globalization

Figure 1 documents the rise of income gaps between nations since 1820. While the
evidence may not be as precise, we also know that global income divergence started
long before 1820. Indeed, international income gaps almost certainly widened after
1600 or even earlier. Real wages, living standards, health and (especially) output per
capita indicators all point to an early modern ‘great divergence’ which took place in
three dimensions—between European nations, within European nations and between
Europe and Asia. Real wages in England and Holland pulled away from the rest of the
world in the late seventeenth century (van Zanden 1999; Pomeranz 2000; Allen 2001;
Pamuk and Ozmucur 2002; Allen et al. 2002). Furthermore, between the sixteenth and
the eighteenth centuries the landed and merchant classes in England, Holland, along
with France pulled far ahead of everyone—their compatriots, the rest of Europe, and
probably any other region on earth. This divergence was even greater in real than in
nominal terms, because luxuries became much cheaper relative to necessities (Hoffman
et al. 2002; Allen et al. 2002), an issue with powerful contemporary analogies, as we
shall see below. While we will never have firm estimates of the world income gaps
between 1500 and 1820, what we do have suggest unambiguously that global
inequality rose long before the first industrial revolution. Thus, industrial revolutions
were never a necessary condition for widening world income gaps. It happened with
industrial revolutions and it happened without them.9

9 Granted, nineteenth century industrial revolutions greatly contributed to an acceleration in the growing gap
between industrial core and preindustrial periphery (e.g. Pritchett 1997).

14
Despite the popular rhetoric about an early modern world system, there was no true
globalization move after the 1490s and the voyages of de Gama and Columbus. As I
argued previously using Figure 2, intercontinental trade was monopolized, and huge
price markups between exporting and importing ports were maintained even in the face
of improving transport technology and European ‘discovery’. Furthermore, most of the
traded commodities were non-competing: that is, they were not produced at home and
thus did not displace some competing domestic industry. In addition, these traded
consumption goods were luxuries out of reach of the vast majority of each trading
country’s population. In short, pre-1820 trade had only a trivial impact on the living
standards of anyone but the very rich. Finally, and as I pointed out above, the migration
of people and capital was only a trickle before the 1820s. True globalization began
only after the 1820s.

Thus, while global income divergence has been with us for more than four centuries,
globalization has been with us for less than two. This conflict raises serious doubts
about the premise that rising world integration is responsible for rising world
inequality. According to history, globalization has never been a necessary condition for
widening world income gaps. It happened with globalization and it happened without
it.

5.2 When the nineteenth century leader went open: Britain

Britain’s nineteenth century free trade leadership, especially its famous corn law repeal
in 1846, offers a good illustration of how the effects of global liberalization depend on
the leader, and how the effects of going open can be egalitarian for both the world and
for the liberalizing leader. The big gainers from nineteenth century British trade
liberalization were British labor—especially unskilled labor—and the rest of Europe
and its New World offshoots, while the clear losers were British landlords, the world’s
richest individuals (Williamson 1990). How much the rest of the world gained (and
whether British capitalists gained at all) depended on foreign trade elasticities and
induced terms of trade effects. But since these terms of trade effects were probably
quite significant for what was then called ‘the workshop of the world’, Britain must
have distributed considerable gains to the rest of the world as well as to her own
workers. Workers—especially unskilled workers—gained because Britain was a food
importing country10 and because labor was used much less intensively in import-
competing agriculture than was land (Irwin 1988; Williamson 1990). Whether and how
much the periphery gained also must have depended on deindustrialization there, a

10 Labor would not have gained much from free trade on the continent since, among other things, agriculture was
a far bigger employer, so big that the employment effects (the nominal wage) dominated the consumption effects
(the cost of living). See O’Rourke (1997).

15
long-run force I explore further below. History offers two enormously important
historical cases where the world leader going open had completely different effects:
pro-global liberalization in nineteenth century Britain was unambiguously egalitarian at
the national and, in the short run at least, the world level—American liberalization in
the late twentieth century was not.

5.3 European followers and the New World

What about the globalization and inequality connection for the rest of Europe and its
New World offshoots? Two kinds of (admittedly imperfect) evidence document
distributional trends within countries participating in the global economy. One relies on
trends in the ratio of unskilled wages to farm rents per acre, a relative factor price
whose movements launched inequality changes in a world where the agricultural sector
was big and where land was a critical component of total wealth.11 It tells us how the
typical unskilled (landless) worker near the bottom of the income pyramid did relative
to the typical landlord at the top (w/r). The other piece of inequality evidence relies on
trends in the ratio of the unskilled wage to GDP per worker (w/y). These trends tell us
whether the typical unskilled worker near the bottom was catching up with or falling
behind the income recipient in the middle.

When w/r and w/y trends are plotted for the Atlantic economy against initial labor
scarcity between 1870 and World War I (Williamson 1997), they conform to the
conventional globalization prediction (Figure 4). Inequality fell and equality rose in
land-scarce and labor-abundant Europe either due to trade boom, or to mass
emigration, or to both, as incomes of the abundant factor (unskilled labor) rose relative
to the scarce factor (land). In addition, those European countries which faced the
onslaught of cheap foreign grain after 1870, but chose not to impose high tariffs on
grain imports (like Britain, Ireland and Sweden), recorded the biggest loss for landlords
and the biggest gain for workers. Those who protected their landlords and farmers
against cheap foreign grain (like France, Germany and Spain) generally recorded a
smaller decline in land rents relative to unskilled wages. To the extent that
globalization was the dominant force, inequality should have fallen in labor-abundant
and land-scarce Europe. And fall it did. However, these egalitarian effects were far
more modest for the European industrial leaders who, after all, had smaller agricultural
sectors. Land was a smaller component of total wealth in the European industrial core
where improved returns on industrial capital, whose owners were located near the top

11 Agricultural output and land input shares are certainly smaller today even in the Third World, but to ignore
them in inequality debate is a big mistake. It is also a mistake to ignore self-employment income in the large
service sector. Yet, economists studying the modern Third World seem to have an obsession with earnings
distributions of hired labor.

16
of the income distribution, at least partially offset the diminished incomes from land,
whose owners tended to occupy the very top of the income distribution.
FIGURE 4: INITIAL REAL WAGE VERSUS SUBSEQUENT INEQUALITY TRENDS 1870-
1913

Source: adapted from O'Rourke and Williamson (1999: Figure 9.2).

FIGURE 5: UNWEIGHTED AVERAGE OF REGIONAL TARIFFS BEFORE WORLD WAR II

Source: adapted from Coatsworth and Williamson (2002: Figure 2a).

Globalization had a powerful inegalitarian effect in the land-abundant and labor-scarce

New World, and for symmetric reasons. Not surprisingly, Latin America, the United
States, Australia, Canada and Russia all raised tariffs to defend themselves against an
invasion of European manufactures and the deindustrialization it would have caused

17
(Coatsworth and Williamson 2002; Blattman, Clemens and Williamson 2002). Indeed,
the levels of protection in the United States, Canada, Australia, Latin America and the
European periphery were huge compared to continental Europe. Figure 5 reports that in
the 1880s the US and Latin America had tariffs five to six times higher than western
Europe, and the European periphery had levels three times higher! It is absolutely
essential to know why tariffs were so much higher in the periphery than in the
European core up to the 1930s, but we save this discussion for the end of the lecture.

5.4 Terms of trade gains in the periphery before 1913

Terms of trade movements might signal who gains the most from trade, and a literature
at least two centuries old has offered opinions about whose terms of trade should
improve most and why (Diakosavvas and Scandizzo 1991; Hadass and Williamson
2002). Classical economists thought the relative price of primary products should rise
given an inelastic supply of land and natural resources. This conventional wisdom took
a revisionist U-turn in the 1950s when Hans Singer and Raoul Prebisch argued that
since 1870 the terms of trade had deteriorated for poor countries in the periphery—
exporting primary products, while they had improved for rich countries in the center—
exporting industrial products.

The terms of trade can be influenced by changes in transport costs and changes in
policy. It can also be influenced by other events, such as world productivity growth
differentials across sectors, demand elasticities, and factor supply responses. But since
transport costs declined so dramatically in the first global century (O’Rourke and
Williamson 1999; Williamson 2002; Findlay and O’Rourke 2002), this is one likely
source that served to raise everybody’s terms of trade. Furthermore, and as we have
seen, rich countries like Britain took a terms of trade hit when they switched to free
trade by mid century, an event that must have raised the terms of trade in the poor, non-
industrial periphery even more. But in some parts of the periphery, especially before
the 1870s, other factors were at work that mattered even more, and they greatly
reinforced these pro-global forces.

Probably the most powerful nineteenth century globalization shock did not involve
transport revolutions at all. It happened in Asia, and it happened in mid century. Under
the persuasion of American gun ships, Japan switched from virtual autarky to free trade
in 1858. In the fifteen years following 1858, Japan’s foreign trade rose 70 times, from
virtually 0 to 7 percent of national income (Huber 1971). The prices of exportables
soared in home markets, rising towards world market levels. The prices of importables
slumped in home markets, falling towards world market levels. One researcher
estimates that, as a consequence, Japan’s terms of trade rose by a factor of 4.9 over
those fifteen years (Yasuba 1996). Thus, the combination of declining transport costs

18
worldwide and a dramatic switch from autarky to free trade unleashed a powerful terms
of trade gain for Japan.

Other Asian nations followed this liberal path, most forced to do so by colonial
dominance or gunboat diplomacy. Thus, China signed a treaty in 1842 opening her
ports to trade and adopting a 5 percent ad valorem tariff limit. Siam adopted a 3 percent
tariff limit in 1855. Korea emerged from its autarkic Hermit Kingdom a little later
(with the Treaty of Kangwha in 1876), undergoing market integration with Japan long
before colonial status became formalized in 1910. India went the way of British free
trade in 1846, and Indonesia mimicked Dutch liberalism. In short, and whether they
liked it or not, Asia underwent tremendous improvements in their terms of trade by this
policy switch, and it was reinforced by declining transport costs worldwide.

For the years after 1870, there is better evidence documenting terms of trade
movements the world around, country by country (Williamson 2002; Hadass and
Williamson 2002). Contrary to the assertions which Prebisch and Singer made half a
century ago, not only did the terms of trade improve for a good share of the non-Latin
American poor periphery12 up to World War I, but they improved a lot more than they
did in Europe. Over the four decades prior to World War I, the terms of trade rose by
only 2 percent in the European center, by almost 10 percent in East Asia, and by more
than 21 percent in the Southern Cone, Egypt and India combined.

Why am I able to report such different historical findings than did Prebisch and Singer,
or than did W. Arthur Lewis a little later? One reason is that Prebisch and his followers
were motivated by deteriorating terms of trade in Latin America, while I am casting a
wider net. Another is that I have only reported the terms of trade performance during
the first global century (up to 1913), not during the anti-global interlude that followed.
A third reason is that the peripheral terms of trade reported here are those which
prevailed in each home market (e.g. Alexandria, Bangkok or Montevideo), not the
inverse of those prevailing in London or New York. In a world where transport costs
plunged steeply, everybody could have found their terms of trade improving, but some
primary producers in the periphery actually enjoyed the biggest pre-war improvements.
If other members of the periphery did not enjoy the same big gains, it was not the fault

12 In two of the studies cited (Williamson 2002; Hadass and Williamson 2002), the periphery sample is limited
to nine—Argentina, Burma, Egypt, India, Japan, Korea, Taiwan, Thailand and Uruguay—which, of course,
excludes non-Southern Cone Latin America where the terms of trade appears to have fallen most dramatically.
This small sample from the periphery is augmented by twelve more countries in a third study: Brazil, Ceylon,
Chile, China, Columbia, Cuba, Greece, Indonesia, Mexico, the Philippines, Peru, and Turkey (Blattman, Clemens
and Williamson 2002).

19
of globalization induced by transport revolutions and liberal policy. Rather, the fault
lay with the characteristics of those primary products themselves.

This pre-1913 terms of trade experience seems to imply that globalization favored
some parts of the poor periphery even more than it did the rich center, and to that
extent it must have been a force for more equal world incomes. That inference is
probably false. Over the short run, positive and quasi-permanent terms of trade shocks
of foreign origin will always raise a nation’s purchasing power, and the issue is only
how much. Over the long run a positive terms of trade shock in primary product
producing countries should reinforce comparative advantage, pull resources into the
export sector, thus causing deindustrialization. To the extent that industrialization is the
prime carrier of capital-deepening and technological change, then economists like
Singer were right to caution that positive external price shocks for primary producers
might actually lower growth rates in the long run. Of course, small-scale, rural cottage
industry is not the same as large-scale, urban factories, so industry may not have been
quite the carrier of growth in the 1870 periphery that it might be in the Third World
today. In any case, while nobody has yet tried to decompose the short-run and long-run
components of quasi-permanent terms of trade shocks like these, there has been a
recent effort to explore the possibility that positive terms of trade shocks had a negative
effect around the periphery (Hadass and Williamson 2002). Adding terms of trade
variables to a now-standard empirical growth model and estimating that model for a
nineteen-country sample between 1870 and 1940, confirms that an improving terms of
trade augmented long-run growth in the center. However, the same terms of trade
improvement was growth reducing in the periphery. It appears that the short-run gain
from an improving terms of trade was overwhelmed by a long-run loss attributed to
deindustrialization in the periphery; in contrast, the short-run gain was reinforced by a
long-run gain attributed to industrialization in the center.

These results imply that globalization-induced (positive) terms of trade shocks before
World War I were serving to augment the growing gap between rich and poor nations.
Did the same happen after 1950 when Prebisch, Singer and other critics of
conventional policy were so vocal? Maybe. Is the same true today, fifty years later?
Probably not. After all, manufactures have been a rapidly rising share of developing
country output and exports over the past three decades. The share of manufactures in
the total commodity exports in developing countries rose spectacularly from around 30
percent in 1970 to more than 75 percent in 2002 (Hertel, Hoekman and Martin 2002:
Figure 2). To put it the other way around, agricultural and mineral primary product
exports as a share in total exports fell from 70 to 25 percent over the past thirty years in
the Third World. Enough of the Third World is now sufficiently labor-abundant and
natural-resource-scarce so that their comparative advantage lies with (simple, labor-

20
intensive) manufactures, implying that the growth of trade has helped it industrialize.
The classic image of Third World specialization in primary products has almost
evaporated, leaving a contracting vestige mainly just in Africa.

5.5 Rising inequality in the primary product exporting periphery

There were powerful global forces at work before 1913 and the Third World was very
much a part of it. There was commodity price convergence within and between Europe,
the newly-settled non-Latin countries, Latin America and Asia, and the price
convergence was bigger in the periphery than it was in the core. The convergence was
driven by a transport revolution that was more dramatic in the Asian periphery where,
in addition, it was not offset by tariff intervention. It also appears that relative factor
prices converged worldwide at the same time that average living standards and income
per capita diverged sharply between center and periphery.13 The relative factor price
convergence was manifested by falling wage-rental ratios in land-abundant and labor-
scarce countries, and rising wage-rental ratios in land-scarce and labor-abundant
countries. The convergence took place everywhere around the globe. These events set
in motion powerful inequality forces in land and resource abundant areas, especially
around the preindustrial periphery, as in Southeast Asia and the Southern Cone. Quite
the opposite forces were at work in land and resource scarce areas, like East Asia.

These distributional events in the periphery were ubiquitous and powerful (Williamson
2002). They must have had important implications for political developments which
probably persisted well in to the late twentieth century, just as W. Arthur Lewis’
research agenda always implied.

5.6 North-North and South-South mass migrations, with segmentation in

between

North-North migrations between Europe and the New World involved the movement
of something like 60 million individuals. We know a great deal about the determinants
and impact of these mass migrations. South-South migration within the periphery was
probably even greater, but we know very little about its impact on sending regions (like
China and India), on receiving regions (like East Africa, Manchuria and Southeast
Asia), or on the incomes of the 60 million or so who moved. As Lewis (1978) pointed
out long ago, the South-North migrations were only a trickle—like today, poor
migrants from the periphery were kept out of the high-wage center by restrictive
policy, by the high cost of the move, and by their lack of education. World labor

13 These facts deserve stress. While there was income per capita and living standards divergence between center
and periphery in the first global century, there was powerful convergence in relative factor prices. One wonders
whether the same has been true in the second global century, and, if so, why economists have not noticed it.

21
markets were segmented then just as they are now. Real wages and living standards
converged among the currently industrialized countries between 1850 and World War I
(Figure 6).14 The convergence was driven primarily by the erosion of the gap between
the New World and Europe. In addition, many poor European countries were catching
up with the industrial leaders. How much of this convergence in the Atlantic economy
was due to North-North mass migration?
FIGURE 6: REAL WAGE DISPERSION IN THE ATLANTIC ECONOMY 1854-1913

Source: adapted from O’Rourke and Williamson (1999: Figure 2.2).

The labor force impact of these migrations on each member of the Atlantic economy in
1910 varied greatly (Taylor and Williamson 1997). Among receiving countries,
Argentina’s labor force was augmented most by immigration (86 percent), Brazil’s the
least (4 percent), with the United States in between (24 percent). Among sending
countries, Ireland’s labor force was diminished most by emigration (45 percent),
France the least (1 percent), with Britain in between (11 percent). At the same time, the
economic gaps between rich and poor countries diminished: real wage dispersion in the
Atlantic economy declined between 1870 and 1910 by 28 percent, GDP per capita
dispersion declined by 18 percent and GDP per worker dispersion declined by 29
percent (Taylor and Williamson 1997; Hatton and Williamson 1998). What
contribution did the mass migration make to that convergence?

Migration affects equilibrium output, wages and living standards by influencing

aggregate labor supply, and these effects have also been estimated. In the absence of
the mass migrations, wages and labor productivity would have been a lot higher in the

14 Figure 6 plots convergence in the Atlantic economy for sample sizes of 13, 15 and 17. The largest sample
includes: Argentina, Australia, Brazil, Canada, the United States; Belgium, Denmark, France, Germany, Great
Britain, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden (Williamson 1996; O’Rourke and
Williamson 1999).

22
New World and a lot lower in Europe. The biggest impact, of course, was on those
countries that experienced the biggest migrations. Emigration is estimated to have
raised Irish wages by 32 percent, Italian by 28 percent and Norwegian by 10 percent.
Immigration is estimated to have lowered Argentine wages by 22 percent, Australian
by 15 percent, Canadian by 16 percent and American by 8 percent.

This partial equilibrium assessment of migration’s impact is higher than a general

equilibrium assessment would be since it ignores trade and output mix adjustments, as
well as domestic and global capital market responses, all of which would have muted
the impact of migration. In any case, the assessment certainly lends strong support to
the hypothesis that mass migration made an important contribution to late nineteenth
century convergence in the North. In the absence of the mass migrations, real wage
dispersion between members of the Atlantic economy would have increased by
something like 7 percent, rather than decrease by 28 percent, as it did in fact. In the
absence of mass migration, wage gaps between Europe and the New World would have
risen from 108 to something like 128 percent when in fact they declined to 85 percent.
These results have been used to conclude that migration was responsible for all of the
real wage convergence before World War I and about two-thirds of the GDP per
worker convergence.

There was an additional and even more powerful effect of North-North mass
migrations on ‘northern’ income distribution. So far I have only discussed the effect of
migration on convergence in per worker averages between countries; I have not
discussed the impact of migration on income distribution within the Atlantic economy
as a whole. To do so, I would need to add on the large income gains accruing to the
millions of poor Europeans who moved overseas. Typically, these migrants came from
countries whose average real wages and average GDP per worker were perhaps only
half of those in the receiving countries. These migrant gains were a very important part
of the net equalizing effect on ‘northern’ incomes of the mass migrations.

North-North mass migrations had a strong leveling influence in the North up to 1913.
They made it possible for poor migrants to improve the living standards for themselves
and their children. It also lowered the scarcity of resident New World labor which
competed with the immigrants, while it raised the scarcity of the poor European labor
that stayed home (whose incomes were augmented still further by emigrant
remittances). South-South and North-North migrations were about the same size. Until
new research tells us otherwise,15 I think it is safe to assume that South-South

15 Timothy J. Hatton and I are embarking on that South-South migration project, covering the years from about
1850 to the present.

23
migrations put powerful downward pressure on real wages and labor productivity in
Ceylon, Burma, Malaysia, Thailand, East Africa, Manchuria and other labor scarce
regions that received so many Indian and Chinese immigrants. Since the sending labor
surplus areas were so huge, it seems less likely that the emigrations served to raise
labor scarcity there by much.

5.7 The unimportance of global capital markets

Using ceteris paribus assumptions, I have just concluded that mass migration
accounted for all of the real wage convergence observed in the Atlantic economy
during the first global century. But ceteris was not paribus since there were other
powerful forces at work, capital accumulation responses being one of them. Capital
accumulation was rapid in the New World, so much so that the rate of capital
deepening was faster in the United States than in any of its European competitors, and
the same was probably true of other rich New World countries. Thus, the mass
migrations may have been at least partially offset by capital accumulation, and a large
part of that accumulation was being financed by international capital flows which
reached magnitudes unsurpassed since. One study has made exactly this kind of
adjustment (Taylor and Williamson 1997) by implementing the zero-migration
counterfactual in a model where the labor supply shocks generate capital flow
responses that maintain a constant rate of return on capital (e.g. perfect global capital
market integration).16 The assumed capital-chasing-labor offsets are certainly large in
this experiment, but mass migration still explains about 70 percent of the convergence,
leaving only about 30 percent to other forces.

Capital market responses were simply not big enough to deflate significantly the
powerful income-leveling effects of mass migration within what we now call the
OECD. Indeed, while it is true that global capital markets were at least as well
integrated prior to World War I as they are today (Obstfeld and Taylor 1998, 2002),
capital flows were mainly an anti-convergence force. This statement is, of course,
inconsistent with simple two-factor-theory prediction that capital should flow from rich
to poor countries. It never did. As Robert Lucas (1990) made famous, Table 2 shows
that British capital inflows and GDP per capita were positively, not negatively,
correlated just before World War I and that the same was true for all private capital
inflows in the 1990s (Clemens and Williamson 2001b; see also Obstfeld and Taylor
2002). The wealth bias that Lucas and others have noticed was just as powerful a
century ago, and it is explained by the fact that capital chased after abundant natural

16 In a recent paper, Davis and Weinstein (2002) do the same for the US today, agreeing that all factor inflows,
capital and labor, should be looked at together.

24
resources, youthful populations, and human-capital abundance. It did not chase after
cheap labor.
TABLE 2: WEALTH BIAS DURING THE TWO GLOBAL CENTURIES
Time period 1907-13 1992-8
Dependent variable Annual average gross British Annual average change in stock
capital received of private capital liabilities
(flow, in 1990 US$) (flow, in 1990 US$)

GDP, 1990 US$ 0.000208 0.00467

(3.32)*** (8.68) ***
[0.534] [0.624]

GDP per capita, 1990 US$ 10,700 97,900

(2.43)** (2.20)**
[0.965] [0.410]

Constant -11,100,000 -44,700,000

(-1.06) (-0.11)

Estimator OLS OLS

N 34 155
R2 0.414 0.463
Source: adapted from Clemens and Williamson (2001b: Table 2).

Note: t-statistics are in parentheses. Elasticities (at average regressor values) are in bold square brackets.
*** Significant at the 1% level. ** Significant at the 5% level.

International capital flows were never a pro-convergence force. They drifted towards
rich, not poor, countries; they raised wages and labor productivity in the labor-scarce
and resource-abundant New World, not the labor-abundant Third World. And what was
true of the first global century has also been true of the second. But this does not imply
that the Third World has been losing capital by export.17 Rather, it implies that there
has always been a churning of capital among richer countries outside of Asia and
Africa. Nor does it imply that global capital markets have been at fault for failing to
redistribute world capital towards poor countries. Instead, it implies that, for other
reasons, the poor countries have never been the best place to make investments.

17 Apparently, Africa has suffered significant capital flight in recent times. Indeed, as of 1990, Africans placed a
huge 39 percent of their wealth portfolios outside the region, a year when the figure was 3 percent for South Asia,
6 percent for East Asia and 10 percent for Latin America (Collier and Gunning 1999:92). This is hardly
surprising given that the region has suffered negative terms of trade shocks, civil war and confiscation.

25
5.8 Trade policy and international income gaps: why the big regime switch?

About thirty years ago, Paul Bairoch (1972) argued that protectionist countries grew
faster in the nineteenth century, not slower as every economist has found for the late
twentieth century. Bairoch’s sample was mainly from the European industrial core, it
looked at pre-1914 experience only, and it invoked unconditional analysis, controlling
for no other factors. Like some modern studies (see Table 1), Bairoch simply compared
growth rates of major European countries in protectionist and free trade episodes. More
recently, Kevin O’Rourke (2000) got the Bairoch finding again, this time using
macroeconometric conditional analysis on a ten-country sample drawn from the pre-
1914 Atlantic economy (Australia, Canada, Denmark, France, Germany, Italy,
Norway, Sweden, UK, US). In short, these two scholars were not able to find any
evidence before World War I supporting the openness-fosters-growth hypothesis.18

These pioneering historical studies suggest that there was a fundamental tariff-growth
regime switch somewhere between the start of World War I and the end of World War
II: before the switch, protection was associated with fast growth; after the switch,
protection was associated with slow growth.19 Michael Clemens and Jeffrey
Williamson (2001a) think the best explanation for the tariff-growth paradox is the fact
that during the interwar, and led by the industrial powers, tariff barriers facing the
average exporting countries rose to very high levels; and since World War II, again led
by the industrial powers, tariff barriers facing the average exporting country fell to
their lowest levels in a century and a half. A well developed theoretical literature on
strategic trade policy20 predicts that nations have an incentive to inflate their own terms
of trade by tariffs, but thereby to lower global welfare—a classic prisoner’s dilemma.
Inasmuch as favorable terms of trade translate into better growth performance and
tariffs are non-prohibitive, we might expect the association between own tariffs and
growth to depend at least in part on the external tariff environment faced by the country
in question. After accounting for changes in world policy environment, Clemens and
Williamson show that there is no incompatibility between the positive tariff-growth
correlation before 1914 and the negative tariff-growth correlation since 1970.

It has not always been true that open countries finish first, and it need not be true in the
future either. There is growing evidence suggesting that the benefits of openness are

18 There are two additional studies worth mentioning here. Capie (1983) found support for the Bairoch
hypothesis using event analysis with a pre-1914 European sample of four (Germany, Italy, the UK and Russia).
Vamvakidis (2002) could not find any interwar evidence supporting the openness-fosters-growth hypothesis
either, although it was (once again) based on a small, mostly OECD sample.
19 In an influential article, Rodriguez and Rodrik (2001) have argued that the late twentieth century evidence
only allows us to say that free trade was not harmful for growth.
20 Exemplified by Dixit (1987) and recently surveyed in Bagwell and Staiger (2000).

26
neither inherent nor irreversible but rather depend upon the state of the world. When
considering the move to openness, heads of state are facing a game, not an isolated
decision. The low-level equilibrium of mutually high tariffs is only as far away as some
big world event that persuades influential leader countries to switch to anti-global
policies. Feedback ensures that the rest must follow in order to survive. Thus, today’s
low-tariff equilibrium was only as far away as OECD coordination in the early postwar
years, and the creation of transnational public institutions whose express purpose was
to impede a return to interwar anti-global autarky.

But what sparks such shifts from one equilibrium to another? Why did it happen in the
1920s and 1950s? Could it happen again?

5.9 Trade policy and international income gaps: What about the pre-1940
periphery?

Were Latin America, Eastern Europe and the rest of the periphery part of this paradox,
or was it only an attribute of the industrial core? While the recent work cited above has
shown that protection fostered growth in the industrial core before World War II, it
also shows that it did not do so in most of the periphery (Clemens and Williamson
2001a; Coatsworth and Williamson 2002). Table 3 reports this result, where the model
estimated is of the convergence variety, but it is conditioned only by the country’s own
tariff rate and regional dummies. The tariff rate and GDP per capita level are both
measured at year t, while the subsequent GDP per capita growth rate is measured over
the half decade following.21 The two world wars are ignored.

The tariff-growth paradox is stunningly clear in Table 3. In columns (1) and (3), the
estimated coefficient on log of the tariff rate is 0.14 for 1875-1908 and 0.36 for 1924-
34. Thus, and in contrast with late twentieth century evidence, tariffs were associated
with fast growth before 1939. But was this true for all regions, or was there instead an
asymmetry between industrial economies in the core and primary producers in the
periphery? Presumably, the protecting country has to have a big domestic market, and
has to be ready for industrialization, accumulation, and human capital deepening if the
long-run tariff-induced dynamic effects are to offset the short-run gains from trade
given up. Table 3 tests for asymmetry in columns (2) and (4), and the asymmetry
hypothesis wins. That is, protection was associated with faster growth in the European
core and their English-speaking offshoots (the coefficient on own tariff 1875-1908 is
0.56 and highly significant), but it was not associated with fast growth in the European

21 Thus, the last pre-World War II observation is 1934, which relates to growth between 1934 and 1939, and the
last pre-World War I observation is 1908, which relates to the growth between 1908 and 1913.

27
TABLE 3: TARIFF IMPACT OF GDP PER CAPITA GROWTH BY REGION
Dependent variable 5-Year Overlapping Average Growth Rate
(1) (2) (3) (4)
Included countries All All All All
Years per period 1 1 1 1
Time interval 1875-1908 1875-1908 1924-34 1924-34

In GDP/capita 0.15 0.10 -0.73 -0.89

1.14 0.75 -1.77 -2.13

In own tariff 0.14 0.56 0.36 1.65

1.64 3.35 1.27 2.83

(European periphery dummy) -0.72 -2.45

x (in tariff rate) -3.32 -3.18

(Latin America dummy) -0.97 0.58

7x (in tariff rate) -3.15 0.49

(Asia dummy) x (in tariff rate) -0.19 -1.47

-0.84 -2.02

European periphery dummy -0.21 1.58 -0.04 6.15

-1.24 2.77 -0.08 3.10

Latin America dummy 0.19 3.01 -0.73 -3.31

0.94 3.13 -1.31 -0.96

Asia dummy -0.26 0.30 -1.17 2.39

-1.09 0.55 -1.52 1.24

Constant -0.12 -0.76 5.92 3.99

-0.11 -0.68 1.55 1.05

Country dummies? no no no no
Time dummies? no no no no

N 1,190 1,190 372 372

R2 0.0357 0.0498 0.0227 0.0605
Adj. R2 0.0317 0.0433 0.0094 0.0398
Source: adapted from Coatsworth and Williamson (2002: Table 1).

Note: t-statistics are in italics.

or Latin American periphery, nor was it associated with fast growth in interwar Asia
(when tariffs rose even in the colonies: see Figure 5). Indeed, before World War I
protection in Latin America was associated significantly and powerfully with slow
growth. The moral of the story is while policymakers in Latin America, Eastern Europe
and the Mediterranean may, after the 1860s, have been very aware of the pro-

28
protectionist infant-industry argument22 offered for a newly integrated (zollverein)
Germany by Frederich List or for a newly independent (economically federated)
United States by Alexander Hamilton, there is absolutely no evidence which would
have supported those arguments in the periphery. We must look elsewhere for plausible
explanations for the exceptionally high tariffs in Latin America and the European
periphery during the first global century.

5.10 Lessons of history I: Will there be South-North mass migration in our

future?

It might be useful to repeat what we have learned about the mass European emigration:
almost all of the observed income convergence in the Atlantic economy, or what we
are now calling the North, was due to this North-North mass migration, and that same
movement also generated more equal incomes in the labor-abundant sending regions. It
is important to remember this fact when dealing today with the second global century.

Although the migrations were immense during the age of mass North-North and South-
South migration prior to World War I, there was hardly any South-North migration to
speak of. Thus, while the mass migration to labor scarce parts of the North played a big
role in erasing poverty in the labor surplus parts of the North, it did not help much to
erase poverty in the South. The same is true today. Will this world labor market
segmentation break down in the near future? It all depends on policy. Certainly
demographic and educational forces are contributing to the breakdown of world labor
market segmentation along South-North lines. As young adult shares shrink in the
elderly OECD, and while they swell in the young Third World going through
demographic transitions, perhaps the pressure will become too great to resist the move
to a more liberal OECD immigration policy, especially in Europe and Japan. The
educational revolution in the Third World (Easterlin 1981; Schultz 1987) has helped
augment this pressure, as potential emigrants from poor countries are better equipped
to gain jobs in the OECD (Clark et al. 2002; Hatton and Williamson 2002).

The two underlying fundamentals that drove European emigration in the late nineteenth
century were the size of real wage gaps between sending and receiving regions—a gap
that gave migrants the incentive to move, and demographic booms in the low-wage
sending regions—a force that served to augment the supply of potential movers

22 Late nineteenth century Latin American policymakers were certainly were so aware (Bulmer-Thomas
1994:140). However, it is important to stress ‘late’ since the use of protection specifically and consciously to
foster industry does not occur until the 1870s or 1890s: e.g. Argentina with the 1876 tariff; Mexico by the early
1890s; Chile with its new tariff in 1897; Brazil in the 1890s; and Colombia in early 1900s (influenced by
Mexican experience). So, the qualitative evidence suggests that domestic industry protection becomes a
motivation for Latin American tariffs only in the late nineteenth century.

29
(Hatton and Williamson 1998). These two fundamentals are even more prominent in
Africa today, and recent work suggests that Africans seem to be just as responsive to
them as were Europeans a century ago (Hatton and Williamson 2001, 2002). Although
this is no longer an age of unrestricted intercontinental migration, new estimates of net
migration for the countries of sub-Saharan Africa suggest that exactly the same forces
are at work driving African cross-border migration today. Rapid growth in the cohort
of young potential migrants, population pressure on the resource base, and poor
economic performance are the main forces driving African emigration. In Europe a
century ago, more modest demographic increases were accompanied by strong
catching-up economic growth in low-wage emigrant regions. Furthermore, the sending
regions of Europe eventually underwent a slowdown in demographic growth serving to
choke off some of the mass migration. Yet, migrations were still mass. Africa today
offers a contrast: economic growth has faltered, its economies have fallen further
behind the leaders, and there will be a demographic speed up in the near future. The
pressure on African emigration is likely to intensify, including a growing demand for
entrance into high-wage labor markets of the developed world. Indeed, if European
doors were swung open, there is an excellent chance that by 2025 Africa would record
far greater mass migrations than did nineteenth century Europe. The demographic
unknown in this equation is, of course, African success in controlling the spread of the
HIV/AIDS. If it is controlled early, then these emigration predictions are more likely to
prevail.

This analysis for African emigation has been recently extended to US immigration by
source from 1971 to 1998 (Clark et al. 2002; Hatton and Williamson 2002). Here
again, the economic and demographic fundamentals that determine immigration rates
across source countries are estimated—income, education, demographic composition
and inequality. The analysis also allows for persistence in these patterns as they arise
from the impact of the existing immigrant foreign-born stocks implying strong ‘friends
and neighbors’ effects. Most of these Third World fundamentals will be serving to
increase the demand for high-wage jobs in the OECD. How will the OECD respond to
this challenge? If it opens its doors wider, the mass migrations would almost certainly
have the same influence on leveling world incomes and eradicating poverty that it did
in the first global century. It would help erode between-country North-South income
gaps, and it would improve the lives of the millions of poor Asians and Africans
allowed to make the move. And it would help eradicate poverty among those who
would not move, making their labor more scarce at home and augmenting their
incomes by remittances, forces that were powerful in pre-quota Europe a century ago.

30
Inequality would rise among OECD residents, of course, just as it did in the immigrant-
absorbing New World a century ago.23 Perhaps not as much, since the unskilled with
whom the immigrants compete are a much smaller share of the OECD labor force
today, but inequality would rise just the same. Are we ready to pay that price? Perhaps
not. Indeed, we have seen how rising inequality created an anti-global backlash a
century ago, a backlash that included a retreat into immigrant restriction that still
characterizes the high-wage OECD today.

5.11 Lessons of history II: Absolute or relative income? Nominal or real income?

The debate over the impact of globalization on world inequality almost always
measures performance in relative terms. The questions posed are: Have international
income gaps between poor and rich countries widened with globalization? Has
inequality within countries widened with globalization? Something is very wrong with
these questions and the measures they imply. Here are better questions: If gaps
between rich and poor countries have widened, and if globalization is the cause, is it
because poor countries have not gained from going global, or is it because they have
actually lost? If the gaps between rich and poor within countries have widened, and if
globalization is the cause, is it because poor citizens have not gained by their country
going global, or is it because they have actually lost? To the extent that policy is driven
by the absolute losses to vocal citizens and/or vocal nations, rather than relative losses,
it is all the more amazing that so many contemporary economists insist on using
relative inequality measures. Economic historians know better. I offer two examples.

Example 1:

During the great British political debates over a move to free trade in the decades
before the 1846 Repeal of the Corn Laws, predicted impact was always assessed both
by reference to nominal incomes on the employment side and to consumption goods
prices on the expenditure side. Indeed, free traders called the high duties on agricultural
imports ‘bread taxes’ (Williamson 1990), and thought that the relative price of this
wage good (grain) was central to working class living standards. And they were
absolutely right. Since grain—and its derivative, bread—made up such an enormous
share of working class budgets, the falling relative price of this importable made a
fundamental contribution to the rise in real wages and the living standards of the poor.

23 I stress ‘residents’ here, since the addition of low-wage immigrants (especially those without the vote) at the
bottom of a country’s income distribution has far less politically-explosive implications than their presence may
have on the wages of low-skilled ‘residents’ (who do have the vote). A look at the structure of wages will control
for this important distinction in immigrant countries, but a look only at the country’s income distribution may
not.

31
Example 2:

During the great rise in European inequality between 1500 and 1800, when Malthusian
forces dominated the closed European economy (O’Rourke and Williamson 2002a,
2002c), staple food and fuels became more expensive, while luxury goods, like
imported exotics and domestic servants, became cheaper (Hoffman et al. 2002). These
relative price changes served to augment rising nominal inequality and, indeed, to
reduce living standards of the working poor. What happened in the nineteenth century
when Europe went open? The price of imported food fell, contributing to the absolute
real wage gains associated with the industrial revolution, and to an absolute decline in
land rents. What had been a pre-globalization inegalitarian price effect was converted
into a post-globalization egalitarian price effect. And since the poor devote such a large
share of their budget to food, the poorest gained the most.

Economic historians cannot take all the credit for asking the right questions, since one
can also find a few rare examples in the huge literature on the current globalization-
inequality connection. David Dollar and Aart Kraay (2000b) report from late twentieth
century country cases and cross-country analysis that globalization leads to poverty
reduction in poor countries, and that (Dollar and Kraay 2000b) trade openness beneifts
the poor as much as it benefits all others.24 Of course, it may not be the poor who vote,
and thus the impact of going open on their economic performance may unimportant to
policy formation in poor countries and thus to the survival of global liberialism there.

The two historical examples from the first global century suggest an agenda for the
second global century. If going global has had a real impact on participating economies
over the past three decades, then we should see its impact on relative commodity prices
in home markets: the price of importables should have fallen relative to the price of
exportables and perhaps even relative to the price of non-tradables. What do the rich
and poor consume in these countries? What happened to the cost of their consumption
market baskets when their country went open? Did the price movements on the
expenditure side serve to reinforce or offset income movements on the employment
side? The answers to these questions are very hard to find in the literature on the
second global century. True, some time ago William Cline (1980) asked whether world
commodity price shocks had much to do with within country nominal income
inequality, concluding ‘not much’, while, as I pointed out above, Robertson (2001)

24 A more recent study by Sala-i-Matin (2002) is more descriptive, asking only what happened from 1970 to
1998, assigning no blame or applause to causes. He shows that while poverty rates have fallen since 1970,
within-country inequality has increased. See also Chen and Ravallion (2001).

32
recently asked the same question of Mexico since NAFTA, concluding a ‘great deal’.25
But do global-induced relative commodity changes induce uneven real income changes
on the expenditure side to the extent that the poor consume a very different market
basket than the rich? They certainly did for Vietnam in the 1990s. According to
Edmonds and Pavcnik (2002), during the liberal period between 1993 and 1998 the
price of rice rose by 29 percent relative to the Vietnamese CPI, and this relative price
change must have had important inegalitarian effects on the expenditure side since the
budget of the poor in that country is so dominated by rice.

It seems to me that economists should be searching for contemporary cases where the
expenditure budgets of the rich and poor are very different, and where the rich
consume in large proportions skill and capital intensive importables plus the services of
the poor, and where the poor consume in large proportions land-intensive food and
housing. They should also search for countries that have a recent history of switching
from anti-global to pro-global policies. The best places to find both conditions satisfied
are, of course, poor countries in Asia and Africa.

5.12 Lessons of history III: Accommodating the losers with safety nets and
suffrage

Any force that creates more within-country inequality is automatically blunted today—
at least in the OECD, a point that is sometimes overlooked in the inequality debate.
That is, any rise in the inequality of households’ net disposable post-fisc income will
always be less than the rise in gross pre-fisc income inequality. Any damage to the
earnings of low-skilled workers is partially offset by their lower tax payments and
higher transfer receipts, like unemployment compensation or family assistance.
Broadening the income concept therefore serves to shrink any apparent impact of
globalization on the inequality of living standards. And by muting their losses, such
safety nets also, presumably, mute political backlash.

So far, so good. But does globalization destroy these automatic stabilizers by

undermining taxes and social transfer programs? In a world where businesses and
skilled personnel can flee taxes they don’t like, there is the well-known danger that
governments might compete for internationally mobile factors by cutting tax rates and
thus social spending. As Jonas Agell (1999, 2000) and Dani Rodrik (1997, 1998) have
stressed, however, the relationship between a country’s vulnerability to international

25 To quote Robertson (2001:3): ‘When Mexico joined the GATT, it opened its borders to trade with an arguably
labor-abundant world, which may explain why it protected less-skill-intensive industries. Joining NAFTA,
however, deepened integration with skill-abundant ... US and Canada. The relative price of skill-intensive goods
reversed its rise. As suggested by the Stolper-Samuelson theorem, relative wages also reversed their trend’.

33
markets and the size of its tax-based social programs is positive, not negative as a ‘race
to the bottom’ would imply. Thus, countries with greater global market vulnerability
have higher taxes, more social spending, and broader safety nets. Furthermore,
‘vulnerability’ to global market changes is in part an endogenous policy choice: there is
a trade-off between going open and investing in safety nets. In any case, while there
may be other reasons for the positive correlation between openness and social
programs, there is no apparent tendency for globalization to undermine the safety nets.

While these stabilizers certainly prevail in the OECD today, one might suppose they
were not common during the first global century when such safety nets were not yet in
place. One might also suppose that there was no trade-off between going open and
investing in safety nets at that time in what we now call the OECD. If one was inclined
to make those suppositions, one would be very wrong. Europe was globalized by 1913,
and the increased market vulnerability created greater wage and employment
instability. In a two recent papers, Michael Huberman by himself (2002) and with
Wayne Lewchuk (2001) show that authorities responded to workers’ complaints by
establishing labor market regulations and social insurance programs, and by giving
them the vote. Empirical analysis of seventeen European countries shows that the
legislation gave workers reason to support free trade. Thus, globalization was
compatible with government intervention before 1913 just as it has been since 1950.
And, to repeat, the first global century was also one during which the vote was
extended increasingly to the previously disenfranchised (Acemoglu and Robinson
2000; Huberman and Lewchuk 2001). It also appears that the two were related. The
interesting question is how long it will take poor nations today to put the same modern
safety nets in place and to empower all citizens in the debate over global policy
choices.

5.13 Lessons of history IV: Why do countries protect?

What better place to end this lecture than to ask: Why do countries protect? I am aware
that the recent decade or so has generated a flourishing theoretical literature on
endogenous tariffs. That literature is primarily motivated by recent OECD, and mainly
US, experience, thus ignoring the enormous variance over time and across regions with
very different endowments, institutions and histories.

Look again at Figure 5, where the enormous variance in levels of protection are
documented for both the first global century and for the interwar years. Three big facts
are revealed by Figure 5. First, tariffs in the independent periphery (Latin America, the
non-Latin European offshoots and the European periphery) were vastly higher than
they were in the European core. Second, in an apparent—but maybe not real—
globalization backlash, tariffs rose much more steeply in the periphery than in the

34
European core during the first globalization century up to World War I. Third, what
made the interwar years so autarkic was not a move towards protection in the
periphery—since tariffs in Latin America, the European periphery and the non-Latin
offshoots were just about as high in the 1930s as they were before World War I.26
What made the interwar years so autarkic was the rise of protection in the European
core and the United States.

Economists need to confront these facts and to offer explanations for them. When one
does so for Latin America from 1820 to 1950, one finds that the motivations for
protection were very complex and changed over time (Coatsworth and Williamson
2002). Those exceptionally high Latin American tariffs were driven up by government
revenue needs, strategic tariff reactions to trading partner policy (e.g. very high tariffs
in the United States), Stolper-Samuelson lobbying forces, and protection of the local
manufacturing industry. Before we can be confident about what causes globalization
backlash today, we need to know what caused it in the past. Over the century 1820-
1913,27 only a (perhaps small) part of the anti-global policy in Latin America was
driven by development goals, by deindustrialization fears, or by the complaints of the
losers. Furthermore, these determinants changed over time: revenue goals diminshed in
importance as Latin America became better integrated with global capital markets, as
pax americana latina diminished the need for and thus the financial burden of standing
armies, and as these young countries developed less distorting internal tax revenue
sources. Economists need to make the same kind of assessment for the second global
century if we are to understand the sources of globalization backlash better.

26 Figure 5 measures ‘protection’ by average tariff levels only, thus ignoring non-tariff barriers. NBTs were on
the rise in the interwar, so the indicator in Figure 5 understates the anti-global regime switch.
27 Chris Blattman, Michael Clemens and I (2002) expand the historical analysis from Latin America to the rest
of the world between 1870 and 1937.

35
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WIDER ANNUAL LECTURES

2002 WIDER Annual Lecture

Winners and Losers over Two Centuries of Globalization
Professor Jeffrey G. Williamson

2001 WIDER Annual Lecture

Horizontal Inequality: a Neglected Dimension of Development
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2000 WIDER Annual Lecture

Globalization and Appropriate Governance
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1999 WIDER Annual Lecture

Is Rising Income Inequality Inevitable? A Critique of the Transatlantic Consensus
Professor Anthony B. Atkinson

1998 WIDER Annual Lecture

More Instruments and Broader Goals: Moving Toward the Post-Washington
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Professor Joseph E. Stiglitz

1997 WIDER Annual Lecture

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