NBER Reporter: Summer 2001

Globalization in Historical Perspective

An NBER Conference on "Globalization in Historical Perspective," organized by Michael D. Bordo, NBER and Rutgers University, Alan M. Taylor, NBER and University of California, Davis, and Jeffrey G. Williamson, NBER and Harvard University, took place on May 4 and 5 in California. The following topics were discussed:

Ronald Findlay, Columbia University, and Kevin O'Rourke, NBER and Trinity College, Dublin, "Commodity Market Integration, 1500-2000"

Discussant: Douglas Irwin, NBER and Dartmouth College

Barry Chiswick, University of Illinois, Chicago, and Timothy Hatton, University of Essex, "International Migration and the Integration of Labor Markets"

Discussant: Riccardo Faini, International Monetary Fund

Maurice Obstfeld, NBER and University of California, Berkeley, and Alan M. Taylor, "Globalization and Capital Markets"

Discussant: Richard Portes, NBER and London Business School

J. Bradford DeLong, NBER and University of California, Berkeley, and Steven Dowrick, Australian National University, "Globalization and Convergence"

Discussant: Charles Jones, NBER and Stanford University

Peter H. Lindert, University of California, Davis, and Jeffrey G. Williamson,

"Does Globalization Make the World More Unequal?"

Discussant: Lant Pritchett, Harvard University

Nicholas Crafts and Anthony Venables, London School of Economics, "Globalization and Geography: An Historical Perspective"

Discussant: Richard Baldwin, NBER and University of Geneva

Gregory Clark, University of California, Davis, and Robert Feenstra, NBER and University of California, Davis, "Technology in the Great Divergence"

Discussant: Joel Mokyr, Northwestern University

Peter L. Rousseau, NBER and Vanderbilt University, and Richard E. Sylla, NBER and New York University, "Financial Systems, Economic Growth, and Globalization"

Discussant: Charles Calomiris, NBER and Columbia University

Michael D. Bordo, and Marc Flandreau, Observatoire Francais des Conjonctures Economiques, "Core, Periphery, Exchange Rate Regimes, and Globalization"

Discussant: Anna Schwartz, NBER

Larry Neal, University of Illinois, Urbana-Champaign, and Marc Weidenmier, Claremont McKenna College, "The Global Economy in Crises: How the Gold Standard Absorbed Shocks, 1880-1914"

Discussant: Mark Taylor, University of Warwick

Barry Eichengreen, NBER and University of California, Berkeley, and Harold James, Princeton University, "Monetary and Financial Reform in Two Eras of Globalization (and In Between)"

Discussant: Peter Kenen, Princeton University

Round Table Discussion: Costs versus Benefits of Globalization

Chair: Peter Kenen; Clive Crook, The Economist; Gerardo Della Paolera, Universidad Torcuato di Tella; Niall Ferguson, Oxford University; Anne O. Krueger, NBER and Stanford University; and Ronald Rogowski, University of California, Los Angeles.

Findlay and O'Rourke discuss trends in international commodity market integration during the second half of the second millennium. Their focus is on intercontinental trade, because the emergence of large-scale trade between the continents has especially distinguished the centuries following the voyages of Da Gama and Columbus. For earlier centuries, they rely more on qualitative information regarding trade routes, and information about quantity in terms of the volumes of commodities actually traded. For later centuries, they switch to more systematic price-based evidence. Among the main themes of the paper is the growing number of goods traded between continents over time (from high value-added to bulk commodities) and substantial commodity market integration, driven by technology (in the late nineteenth century) and politics (in the late twentieth century). However, this trend toward integration was not

monotonic: politics can reinforce or offset the impact of technology, and shocks such as wars and Great Depressions can have long-run effects (through politically induced hysteresis). Finally, the authors conclude that remarkably little is known about commodity market integration trends in the twentieth century.

Chiswick and Hatton describe the determinants and consequences of intercontinental migration. They begin with a review of the history of primarily trans-Atlantic migration to the New World over the last four centuries. The contract and coerced migration from Europe and Africa beginning in the eighteenth century gave way to an era of free European migration. The period of 1850 to 1913 was one of mass migration, primarily from Europe to North America and Oceania. World wars, immigration restrictions, and the Great Depression resulted in low international migration from 1913 to 1945. After World War II, international migration increased sharply, but with changes in the nature of the flows, and under the constraints of immigration controls. Why this international migration? Important explanatory factors include: the relative wages in the origin and destination; the cost of international migration; the wealth to finance the investment; chain migration (kinship and information networks); and government imposed restrictions on the free flow of people. The authors find that the influence of gainers and losers from immigration on policy was mediated by institutional change and by interest group politics.

Obstfeld and Taylor examine the development of international capital mobility since the start of the late nineteenth century's gold standard era. They document the vicissitudes in the international capital market over more than a century, explaining them in terms of the open-economy "trilemma" that policymakers face in choosing among open capital markets, domestic monetary targets, and the exchange rate regime. They then examine a wide array of new evidence, including data on gross asset stocks, interest-rate arbitrage, real interest differentials, and equity-return differentials. On all measures examined, the degree of international capital mobility appears to follow a rough U-shaped pattern: high before world War I, low in the Great depression, and high today. While it is difficult to definitively settle the debate over whether global capital mobility is greater today than it was on the eve of World War I, and thus no such attempt is made in the paper, the authors find that world capital may have flowed more easily to the poorer countries before 1914 than it does today.

At the biggest picture level, the economic history of the twentieth century is dominated by three things: the tremendous explosion in technological knowledge, capital accumulation, and worker skills that have made the world today so much richer than the world of previous centuries; the rise in worldwide relative "divergence" as the industrialized core of the world economy has pulled away from the non-industrialized periphery; and the changing membership of the world economy's core, as the southern cone of South America emerges as the big relative loser while Pacific East Asia and southern Europe emerge as the big relative winners of the past century. DeLong and Dowrick's analysis of the growth performance of 106 countries between 1960 and 1980 confirms the findings of Sachs and Warner (1995) of convergence within the group of countries that was open to trade and capital flows. They are intrigued to find that the result is reversed when they examine growth performance between 1980 and 1988: openness still produces a growth premium, but it is more pronounced for the richer economies.

Virtually all of the observed rise in world income inequality over the last two centuries has been driven by widening gaps between nations, while almost none of it has been driven by widening gaps within nations. Meanwhile, the world economy has become much more globally integrated over the past two centuries. If correlation meant causation, then these facts would imply that globalization has raised inequality between nations, but it has had no clear effect on inequality within nations. Lindert and Williamson argue that the likely impact of globalization on world inequality has been very different from what these simple correlations suggest. Globalization probably mitigated rising inequality between participating nations. The nations that gained the most from globalization are those poor ones that changed their policies to exploit it, while the ones that gained the least did not, or were too isolated to do so. The effect of globalization on inequality within nations has gone both ways, but here too those who have lost the most from globalization typically have been the excluded non-participants. In any case, the net impact of globalization was far too small to explain the observed long-run rise in world inequality.

Most traditional analysis is based on economic models in which there are diminishing returns to most activities. Crafts and Venables propose in this paper that it is not possible to interpret several of the most important aspects of nineteenth century economic development in such a framework. One alternative framework is provided by models of "new trade theory" and "new economic geography" in which market imperfections at the micro level can give rise to increasing returns at a more aggregate level. The interaction between increasing and decreasing returns in these models depends crucially on spatial interactions, so changes in these interactions can have major effects. Globalization can trigger cumulative causation processes that cause uneven development to occur at a variety of different spatial levels: urban, regional, and international. The authors' objective in this paper is to apply this new approach to several aspects of the historical experience of globalization.

Clark and Feenstra examine the changes in per-capita income and productivity from 1700 to modern times, and show four things: 1) incomes per capita diverged more around the world after 1800 than before; 2) the source of this divergence was increasing differences in the efficiency of economies; 3) these differences in efficiency were not attributable to problems of poor countries in getting access to the new technologies of the Industrial Revolution; and 4) the pattern of trade between the poor and the rich economies from the late nineteenth century suggests that the problem of the poor economies was peculiarly a problem of employing labor effectively. This continues to be true today.

Rousseau and Sylla bring together two strands of the economic literature -- on the finance growth nexus and capita market integration -- and explore key issues surrounding each strand through both institutional/country histories and formal quantitative analysis. Historical accounts of the Dutch Republic, England, the United States, France, Germany, and Japan spanning three centuries demonstrate that in each case the emergence of a financial system jump-started modern economic growth. Using a cross-country panel of 17 countries covering 1850-1997, the authors uncover a robust correlation between financial factors and economic growth that is consistent with a leading role for finance. They show that these effects were strongest over the 80 years preceding the Great Depression. Then, by identifying roles for both finance and trade in the convergence of interest rates among the Atlantic economies in the prewar period, they show that countries with more sophisticated financial systems tended to engage in more trade and appeared to be better integrated with other economies. Their results suggest that both the growth and the increasing globalization of these economies depend on improvements in their financial systems.

Bordo and Flandreau focus on the different historical regime experiences of the core and the periphery. Before 1914, advanced countries adhered to gold while periphery countries either emulated the advanced countries or floated. Some peripheral countries were especially vulnerable to financial crises and debt default, in large part because of their extensive external debt obligations denominated in core country currencies. This left them with the difficult choice of floating but restricting external borrowing or devoting considerable resources to maintaining an extra hard peg. Today, while advanced countries can successfully float, emergers who are less financially mature and must borrow abroad in terms of advanced country currencies are afraid to float for the same reason as their nineteenth century forebearers.

To obtain access to foreign capital, they may need a hard peg to the core country currencies. Thus the key distinction between core and periphery countries both then and now, emphasized in this paper, is financial maturity as evidenced in the ability to issue international securities denominated in domestic currency. Evidence from gravity equation across several regimes since 1880 suggests that exchange rate volatility was not a significant detriment to bilateral trade. While adhering to gold was associated with greater trade, this result seems to be explained by deeper institutional forces at work. Evidence from Feldstein-Horioka tests over the same span of history agrees with the "folk" wisdom that financial integration was high before 1914 just as it is today. But the evidence suggests that it was not the exchange rate regime that mattered but the presence of capital controls. Finally, the authors' empirical evidence for core and peripheral countries in 1880-1913 and today, based on traditional money demand regressions, suggests a strong link between financial depth and the exchange rate regime.

The first global financial market appeared in Europe with the near-universal adoption of the gold standard from 1880 to 1914. During this period, a number of financial crises struck at the various financial centers and reverberated through the system of fixed exchange rates to other centers. Nevertheless, the financial system remained intact and the European commitment to the gold standard actually strengthened throughout the period. Neal and Weidenmier analyze the shock absorption characteristics of the system with weekly data on exchange rates and short-term interest rates. The data capture the relative importance of price adjustments in the current account and the short-term capital account for each country during the successive crises. The authors conclude that gold inflation from 1897 to mid-1914 helped to sustain the stability of the system, while the deflationary period from 1880-1896 required countries to adjust short-term interest rates if they were to maintain credible commitment to the gold standard. Countries unable to do this had to abandon or forgo the standard during the deflationary period (Austria, Italy, Portugal, Spain), but were able to shadow it during the inflationary period after 1897 without formally committing, or by committing with protective safeguards. These cautionary commitments, by reducing competition for monetary gold, also helped sustain the gold standard's financial architecture.

Eichengreen and James review the history of international monetary and financial reform in the two eras of globalization, the late nineteenth century and the late twentieth century, and in the period in between. That history is rich, varied, and difficult to summarize compactly. Therefore, the authors structure the narrative by organizing it around a specific hypothesis. That hypothesis is that a consensus on the need for monetary and financial reform is apt to develop when such reform is seen as essential for the defense of the global trading system. In most periods, the international monetary and financial system evolves in a gradual and decentralized manner, largely in response to market forces. The shift toward greater exchange rate flexibility and capital account convertibility since 1973 is the most recent and therefore the most obvious illustration of what is a more general point. Discontinuous reform at a more centralized level - that is, reforms agreed to and implemented by groups of governments - occurs only when problems in the monetary and financial system are seen as placing the global trading system at risk. Throughout the period considered, there has existed a deep and abiding faith in the advantages of trade for economic growth, the principal exception being the 1930s, when trade and prosperity came to be seen as at odds. Consequently, priority has been attached to reform in precisely those periods when monetary and financial problems are perceived as posing a threat to the global trading system and hence to growth and prosperity generally. In contrast, there has never existed a comparable consensus on the benefits of open international capital markets for stability, efficiency, and growth. It follows that disruptions to capital markets that do not also threaten the trading system have had less of a tendency to catalyze reform.

Finally, "A Round Table on the Costs and Benefits of Globalization" was chaired by Peter Kenen of Princeton University. Clive Crook considered the possibility that the process of globalization would be reversed because of a popular fear of economic insecurity, falling real wages among the unskilled, and the incorrect perception that poverty in the Third World would be worsened. Gerardo Della Paolera considered globalization from the perspective of transition countries like his own (Argentina). He raised the question of whether the perceived benefits of furthering the process exceeded the costs for countries like Argentina. Niall Ferguson considered the "big think" issues of political globalization, empires, wars, and the democratization in the context of the long sweep of world history. Anne Krueger discussed the connection between globalization and economic policy in developing countries. Ronald Rogowski concluded the panel by assessing directly the costs and benefits. He argued that globalization was likely to continue in the advanced countries because median voters are net winners but that policies to compensate the losers will continue to be important.

These papers and discussions will be published by the University of Chicago Press in an NBER Conference Volume. Its availability will be announced in a future issue of the NBER Reporter. In advance of publication, these papers are at Books in Progress.

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