NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Markets are Less Integrated Today than 100 Years Ago

"...the re-integration of capital markets since World War II has been slow. Capital markets today -- despite all the journalistic and anecdotal evidence of 'globalization' -- are still less integrated than they were 100 years ago."

How well-integrated have the world's capital markets been in the modern industrial era? In recent decades economic historians have agreed that capital markets were well-integrated in the late 19th century, that they disintegrated somewhat in the period between the two world wars, and that they have been reintegrating speedily since then. Some economists have sought to measure capital-markets integration by examining the correlation between domestic saving and investment rates among the developed countries, on the theory that domestic saving would seek out the highest returns in world capital markets independent of local investment demand. A key, unexpected finding of this research was that capital markets were not well integrated in the 1960s and 1970s.

Now, in an NBER study, Alan Taylor revisits the question and presents a more nuanced picture of the evolution of capital markets. He finds that the conventional wisdom seems to be broadly correct, and he develops and extends the more recent analyses which have found that the re-integration of capital markets since World War II has been slow. He concludes, among other things, that capital markets today -- despite all the journalistic and anecdotal evidence of "globalization" -- are still less integrated than they were 100 years ago.

In International Capital Mobility in History: The Saving-Investment Relationship (NBER Working Paper No. 5743) Taylor assembles and reviews data for a group of 12 countries (Argentina, Australia, Canada, Denmark, France, Germany, Italy, Japan, Norway, Sweden, the United Kingdom, and the United States) over the period from 1850 to 1992. While data are missing for some countries for some years, this is both a larger sample and a longer time span than had been utilized previously. Taylor finds that the average size of capital flows in the pre-World War I era was often as high as 4 to 5 percent of national income. Flows diminished during the 1920s, however, and international capital flows were less than 1.5 percent of national income in the late 1930s. But the all-time low was in the 1950s and 1960s -- around 1 percent of national income -- and while flows increased in the late 1970s and 1980s, they still didn't approach the levels of a century ago.

Taylor also extends the analysis of the correlations between domestic saving and domestic investment to analyze the entire 1850-1992 period for the 12-country group. The results broadly support the conventional view of the late 19th and early 20th centuries, and confirm the earlier research suggesting that capital mobility was low in the post-World-War II era.


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