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Reading Summary Topic 1 - Convergence, Globalization, pre WWI Gold Standard.docx

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University of Toronto St. George
Jon S.Cohen

Reading Summary – 1. Convergence, Globalization and pre WWI Gold Standard O’Rourke and Williamson, Globalization and History (1999) Ch.3*, 4*, 11, 12  Chapter 3: Transport Revolutions and Commodity Market Integration  Key Idea: Commodity market integration: before WWI (due to transportation cost reduction); after WWII (due to more liberal trade policy)  Proxy for commodity market integration: Trade share as GDP (x), price spatial variation (x), correlation (x), regional output variance – specialization (x). Price gap between pars of markets.  Transportation innovation: Steamships & Canals, railroad, refrigeration  European Trade Policy:  British: Corn Law of 1815 (prohibit import)  Corn Law of 1828 (tariff)  1833 (reduce tariff)  1845 (reduce tariff)  1846 (repeal; free trade)  Continental Europe followed slowly; The Cobden Chevalier treaty (1860); “MFN”  Why: free trade idea? British hegemony? Economic interest?  Retreat from 1870s: American civil war tariff; continental European tariff;  National Market Integration: the U.S., Russia, India, Germany  Asia: pretty much forced to open up the market  Chapter 4: Were Heckscher and Ohlin Right?  Heckscher and Ohlin: the commodity price convergence implied factor price convergence.  Four questions:  Real wage convergence? Yes. (ppp-adjusted real wages)  International land rent converge? Yes. (new world vs. protectionist & free trading old world)  Land rent move in absolute term? Not quite; but doesn’t affect the strength of the theory  Relative factor price convergence?  Computable General Equilibrium (CGE)  Britain vs. the U.S.: supported the Heckscher & Ohlin theory, although more apparent on the British side;  Sweden: contradiction. Swedish specific features: grain exporting + protection.  Graphic representation  Econometric Test; decomposition of the wage-rental trend:  50% convergence is due to commodity price convergence for Anglo America;  Not for other countries;  255 overall.  Chapter 11: Forging and Breaking Global Capital Markets  Tremendous capital exports from the center to the periphery; huge amount, large fluctuations.  Global capital market integration:  Assessment: capital flow shares (x); interest rate differentials; regression on domestic investment shares in GDP on its domestic saving share.  Result: increasing capital market integration during booms and decreasing during bust.  Explanation:  Technology: speed & quality of information; telegraph; submarine cable, etc.  Institutions: the gold standard (eliminating exchange rate risk; investors are made more confident and more risk-loving) – but countries are also on the gold standard during 1920s – so this alone for sure cannot explain convergence.  Politics  DFI – Direct Foreign Investment – MNCs: has influence on international convergence, but probably more applicable today than pre WWI.  Chapter 12: International Capital Flows: Causes and Consequence  Observation: Vast majority of European capital export was to the labor-scarce and resource0abundant New World, not to labor-abundant Asia or even to the poorest parts of Europe. i.e. capital flow to the rich, not the poor.  Why the size?  Frontier theory: capital & labor requirement is high in the new world – housing;  Imperialism theory (Hobson): excess saving due to imperialism; unequal income distribution;  Lack of domestic investment opportunities (Lenin)  Lack of New World savings (Taylor & Williamson): high dependency (offset by migration), low saving, demographics.  Why the fluctuation (swing)?  Migration? Railway construction? Wheat trade? Commodity prices?  What’s the impact on convergence?  Late 19 century world capital flows were a force for divergence, not convergence.  Scandinavia: Sweden, Norway, Denmark – huge capital inflow, force for convergence – these countries largely resemble new world – resource abundant and labor scarce;  Periphery: a lot of countries were net capital exporter (Ireland, Italy); or really small capital inflow (Spain, Portugal);  WHY?  Less efficiency technologies (low wage & low return)  Less productive workers (country specific, once they migrate they were fine)  Excessive government borrowing, failure to adhere to the gold standard (Mediterranean) Hatton and Williamson, Global Migration and the World Economy (2005), Chapters 4*, 5, 6*  Chapter 4: What Drove European Mass Emigration?  Real wage gap between home country and foreign destinations: significant; negative  Home real wage itself: positive; reduce supply constraint  Natural increase lagged two decades: direct demographic effect; positive;  Level of industrialization: positive, not strong  Stock of previous migrants living abroad: significant; positive; reduce supply constraint  Time: not strong; positive  Country dummy variable: only Latin dummy & Belgium  Chapter 5: Emigrant Origins and Immigrant Outcomes  Typically young adults between 15 – 29; male;  Old Immigrants (Northern European, British, French, Germany) vs. New Immigrants (South and Eastern Europe) - The Dillingham Commission report (criticized); general optimistic assimilation view.  Immigration quality declined (professional, skills, literacy) – source country composition effect  Immigrants were positive selected  Observable: skill, education, wealth;  Informed speculation: ambition, energy, motivation.  Income incentive (negative selection) + poverty constraint (positive selection)  E.g. Northern Italy vs. Southern Italy; Australia;  There was no big brain drain.  Chapter 6: The Impact of Mass Migration on Convergence and Inequality;  Similar to O’Rourke and Williamson except for this is assessing mass migration  Use ppp-adjusted real wage rates to assess real wage convergence;  Real wage dispersion occur mostly between Europe vs. the New World, than within Europe and within the New World.  They argue that although trade, technology, human capital helped, the central force was mass migration (accounting 70% of convergence, after considering capital chasing labor)  Winner: Old world labor, New world landowner;  Loser: Old world landowner, New world labor – only loser in relative terms, since wages across OECD were rising rapidly in general during that period because of all
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