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.
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.
Econometric Test; decomposition of the wage-rental trend:
50% convergence is due to commodity price convergence for Anglo America;
Not for other countries;
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.
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.
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
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);
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
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