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Globalization and Inequality, Past and Present Author(s): Jeffrey G. Williamson Source: The World Bank Research

Globalization and Inequality, Past and Present Author(s): Jeffrey G. Williamson Source: The World Bank Research Observer, Vol. 12, No. 2 (Aug., 1997), pp. 117-135 Published by: Oxford University Press Stable URL: http://www.jstor.org/stable/3986405 Accessed: 28-07-2015 19:00 UTC

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Globalizationand

Past

and

Inequality,

Present

JeffreyG. Williamson

Thelate nineteenthand late twentiethcenturiessharedmorethanglobalization and economicconvergence.Thetrendtowardglobalizationin bothcenturieswas accompaniedby changesin thedistributionof incomeas inequalityrosein rich countriesandfell in poorones.Betweenone-thirdand one-halfof therisein in- equalitysincethe 1970s in the UnitedStatesand othermembercountriesof the

OrganizationofEconomicCooperationandDevelopment(oEcD)hasbeenattrib-

utedtoglobaleconomicforces,aboutthesameasa century earlier.It appearsthat theinequalityproducedbyglobaleconomicforcesbeforeWorldWarI wasrespon-

sibleinpartfortheretreatfromglobalizationafterthewar.Whatdoesthisretreat implyforthefiuture?Willtheworldeconomyonceagainretreatfromglobalization astherichOECDcountriescomeunderpoliticalpressuretocushionthesideefectsof rising inequality?

Economicgrowthafter1850 in thecountriesthatnow belongto theOrganiza- tion forEconomicCooperationandDevelopment(OECD) canbe dividedinto threeperiods:the latenineteenthcenturybelleepoque,the darkmiddleyears between1914 and 1950, andthe latetwentiethcenturyrenaissance.The first andlastepochswerecharacterizedby rapidgrowth;economicconvergenceas poor countriescaughtup with richones;and globalization,markedby trade booms,massmigrations,andhugecapitalflows.The yearsfrom1914 to 1950 areassociatedwith slow growth,a retreatfrom globalization,and economic divergence.Thus historyoffersan unambiguouspositivecorrelationbetween globalizationandconvergence.Whenthepre-WorldWarI yearsareexamined in detail,the correlationturnsout to be causal:globalizationwas thecritical

factorpromotingeconomicconvergence(Williamson1996a).

Becausecontemporaryeconomists are now debating the impact of the forcesof globalizationon wageinequalityin the OECD countries,the newly liberalizedLatinAmericanregimes,andthe EastAsian "tigers,"it is time to

TheWorldBankResearchObserver,vol. 12, no.2 (August1997), pp. 117-35

C 1997 The InternationalBankfor Reconstructionand Development/ THE WORLD BANK

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ask whether the same distributionalforces were at work during the late nineteenth century.A body of literaturealmost a centuryold arguesthat immigrationhurt Americanlabor and accounted for much of the rise in income inequalityfromthe 1890s to WorldWarI. The decisionby a labor- sympatheticCongressto enact immigrationquotas shows how important the issue was to the electorate.An even older literaturearguesthat cheap grainexportedfromthe New World erodedland rentsin Europeso sharply that landowner-dominatedcontinentalparliamentsraisedtariffsto protect domestic growersfrom the impact of globalization.But nowhere in this historicalliteraturehad anyone constructeddata to test three contentious hypotheseswith importantpolicy implications:

Hypothesis1: Inequalityrose in resource-rich,labor-scarcecountries suchasArgentina,Australia,Canada,andtheUnitedStates.Inequality fell in resource-poor,labor-abundantagrarianeconomies such as Ireland,Italy,Portugal,Scandinavia,andSpain.Inequalitywasmore stableamongtheEuropeanindustrialleaders,includingBritain,France, Germany,andthe Lowlandcountries,allof whomfellin betweenthe richNew WorldandpoorOld World. Hypothesis2: If the first hypothesisis true, a second follows:these inequalitypatternscanbe explainedlargelyby globalization. Hypothesis3: If thissecondhypothesisholds,thentheseglobalization- inducedinequalitytrendshelp explainthe retreatfromglobalization between1913 and 1950.

This articlereviewsthe historicaldebateaboutthefirstglobalizationboom in the late nineteenth centuryand attemptsto tie it to the currentdebate about the globalizationboom in the late twentieth century.The two de-

batesarestrikinglysimilar.They also sharea shortcomingin the empirical analysis:nobody has yet explored this issue with late nineteenth century panel data acrosspoor and rich countries,and, with the importantexcep- tion of Wood (1994), few have done so for the late twentieth centuryde- bateeither(Burtless1995, p. 813). Indeed,until veryrecently,most econo- mists had focused solely on the American experience. The central

contribution of this paperis to

centurythat includes both rich and poor countriesor, in the modernver- nacular,North and South. Itappearsthatglobalizationdidcontributeto theimplosion,deglobalization,

and autarkicpoliciesthat dominatedbetween 1913 and 1950. Indeed,dur- ing theseyearsof tradesuppressionand bindingmigrationquotas,the con- nectionbetweenglobalizationandinequalitycompletelydisappeared.It took the globalizationrenaissanceof the early1970s to renewthis old debate.

explorea databasefor the late nineteenth

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GlobalizationandInequalityin the Lateiventieth Century

From1973throughthe1980s,realwagesofunskilledworkersintheUnited

Statesfellasaresultofdecliningproductivitygrowthandanincreasingdispar-

ityinwagespaidtoworkerswithdifferentskills(Kosters1994;Freeman1996).

Thisdifferencewasmanifestedprimarilybyhigherwagesforworkerswithad-

vancedschoolingandage-relatedskills.Thesametrendswereapparentelse-

whereintheOECDinthe1980s,buttheincreaseinwagegapswastypicallyfar

smaller.Thewideningofwageinequalitiescoincidedwiththeforcesofglobal-

ization,bothintheformofrisingtradeandincreasedimmigration,thelatter

characterizedbyadeclineintheskilllevelsofmigrants(Borjas1994).Tradeas

ashareofgrossnationalproductintheUnitedStatesincreasedfrom12percent

in 1970to25percentin 1990(LawrenceandSlaughter1993),whileexports fromlow-incomecountriesrosefrom8 percentoftotaloutputin 1965to 18

percentin1990(Richardson1995,p.34).Thesedevelopmentscoincidedwith

a shiftinspendingpatternsthatresultedinlargetradedeficitsin theUnited States.

ThestandardHeckscher-Ohlintrademodelmakesunambiguouspredictions:

everycountryexportsthoseproductsthatuseabundantandcheapfactorsof

production.Thusa tradeboominducedbya dropin tariffsorin transport costswillcauseexportsandthedemandforthecheapfactortoboomaswell. Globalizationinpoorcountriesshouldfavorunskilledlabor;globalizationin

richcountriesshouldfavorskilledlabor.LawrenceandSlaughter(1993)ex-

ploredthiswageinequalityandconcludedthattherewaslittleevidencetosup-

portthestandardtrademodelexplanation.Instead,theauthorsconcludedthat technologicalchangewasanimportantsourceof risingwageinequality.Hot debateensued,withnoresolutioninsight. Thisstrandof thedebatestressedtheevolutionof labordemandbyskill,

ignoringthepotentialinfluenceofsupply.Borjas(1994)andBorjas,Freeman,

andKatz(1992)tookadifferentapproach,emphasizinginsteadhowtradeand

immigrationaugmentedthesupplyof laborin theUnitedStates.Theyfirst estimatedtheimplicitlaborsupplyembodiedin tradeflows,sinceimported goodsincreasetheeffectivelaborsupplyintheimportingcountry.Similarly,

exportsimplyadecreasein theeffectivelaborsupplyin theexportingcountry.

In thisway,thehugeU.S.tradedeficitof the1980simplieda 1.5percent

increaseinthelaborforce,andbecausemostoftheimportedgoodsusedun-

skilledlabor,italsoimpliedaworkforcecharacterizedbyanincreasingratioof

unskilledtoskilledlabor.Betweenthe1960sandthe1980s,anincreasingpro- portionofimmigrantstotheUnitedStateswerefromdevelopingnations,which

meantthatafarhigherfractionwererelativelyunskilledjustwhentherewere

moreimmigrants.

JeffreyG.Williamson

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Theseshiftsinthesupplyoflaborproducethedesiredqualitativeresultfor

thepurposesofthisstudy-wageinequalitybetweenskilltypes.Thequantita-

tiveresult,atleastinGeorgeBorjas'(1994)hands,alsoseemstobelarge:he

estimatesthat15to 25 percentof therelativedeclinein thewagesof high- schoolgraduatescomparedwiththoseof collegegraduatesis attributableto

globalizationforces,ofwhichtradeaccountsforone-third,immigration,two-

thirds.Healsoestimatesthat30 to 50percentofthedeclineinthewagesof high-schooldropoutsrelativetothewagesofallotherworkersisattributableto

thesesameforces.HattonandWilliamson(1995;1997)showthatacentury

earlier,immigrationwasafarmoredominantinfluenceonU.S.inequalitythan

wastrade,andfurthermore,thattradeandmigrationinfluencedrelativewages inpracticallyeverycountryinvolvedintheglobalizationexperience. ThusfarthediscussionhasfocusedmainlyontheUnitedStates,perhaps becauserisinginequalityandimmigrationhavebeengreatestthere.Butthe questionisnotsimplywhythedemandforunskilledlaborintheUnitedStates

andevenEuropewasdepressedinthe1980sand1990s(Freeman1995,p.19),

butwhetherthesamefactorswerestimulatingtherelativedemandforlow-skill

laborindevelopingcountries.ThisiswhereAdrianWood(1991,1994,ch.6;

1995b)entersthedebate.Woodwasoneofthefirsteconomiststosystemati-

callyexamineinequalitytrendsacrossindustrialanddevelopingcountries.

Wooddistinguishesthreeskilltypes:uneducatedworkers,thosewithabasic

education,andthehighlyeducated.ThepoorSouthhasanabundanceofun-

educatedlabor,butthesupplyofworkerswithbasicskillsisgrowingrapidly.

TherichNorth,ofcourse,iswellendowedwithhighlyeducatedworkers;its

supplyoflaborwithbasicskillsisgrowingslowly.Woodassumesthatcapitalis

fairlymobileandthattechnologyisfreelyavailable.Astradebarriersfalland

theSouthimprovesitsskillsthroughtheexpansionof basiceducation,it pro-

ducesmoregoodsthatrequireonlybasicskills,whiletheNorthproducesmore high-skillgoods.Itfollowsthattheratioof theunskilledto theskilledwage shouldriseintheSouthandfallintheNorth.Thetendencytowardtherelative convergenceof factorpricesraisestherelativewageof workerswitha basic educationintheSouthandlowersitintheNorth,producingrisinginequality intheNorthandfallinginequalityintheSouth.

Woodconcludesthatthedeclineintherelativewagesofless-skillednorth-

ernworkersis causedbytheeliminationof tradebarriersandtheincreasing

abundanceofsouthernworkerswithabasiceducation.Healsodismissesskill-

usingtechnologicalchangeasapotentialexplanationforrisinginequalitybe-

causelaborandtotalfactorproductivitygrowthbothslowedduringtheperiod.

WoodalsoarguesthatthepatternofincreasingwageinequalityintheNorth

favorsatradeexplanationbecausethereisnocross-countryassociationbetween

inequalitytrendsandtechnologicalprogress.

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Wood'sresearchhasmetwithstiffcriticalresistance.'Sincehisbookap-

pearedin 1994,morehasbeenlearnedaboutthelinkbetweeninequalityand

globalizationindevelopingcountries.Economictheoryarguesthatpoorcoun-

triesshouldbecomemoreegalitarianinthefaceofglobalization,unlessdemo-

graphicorindustrialrevolutionforcesoffsetit.ArecentreviewbyDavis(1996)

reportsthecontrary,andastudyofsevencountriesinLatinAmericaandEast Asiashowsthatwageinequalitytypicallydidnotfallaftertradeliberalization

butratherrose(Robbins1996).Thisapparentanomalyhasbeenstrengthened

byotherstudies,someof whichhavebeenrediscoveredsinceWood'sbook

appeared(Michaely,Papageorgiu,andChoksi1991).Almosttwentyyearsago

Krueger(1978)studiedtendevelopingcountriescoveringtheperiodthrough

1972,andherfindingswerenotfavorabletothesimplepredictionsofstandard

tradetheory.Herconclusionshavebeensupportedby Bourguignonand

Morrisson(1991)andbyrecentworkontheimpactofMexicanliberalization

onwageinequality(FeenstraandHanson1995;Feliciano1996).Noneofthese

studiesisveryattentivetothesimultaneousroleofemigrationfromthesecoun-

tries,however,leavingthedebatefarfromresolved.

GlobalizationandInequalityin the LateNineteenth Century

Thespreadbetweenrealwagesfrom1854to 1913infifteencountriesisshown in figure1.2 Thedownwardtrendconfirmswhatnew-growththeoristscall convergence,thatis,anarrowingintheeconomicdistancebetweenrichand

poorcountries.TheconvergenceismoredramaticwhenAmericaandCanada-

whichwerericher-orwhenPortugalandSpain-whofailedtoplaytheglob-

alizationgame-areexcluded.Convergenceofgrossdomesticproduct(GDP)

perworkerhourhasbeenreportedelsewhere,basedon Maddison's(1991) data.Mostofthisconvergencewasthecombinedresultofthetradeboomand

theprequotamassmigrations(HattonandWilliamson1995;O'Rourkeand

Williamson1994,1995,1996,andforthcoming;TaylorandWilliamson1997;

Williamson1995,1996a).

TradeIssues

Thelatenineteenthcenturywasaperiodofdramaticintegrationofcommodity

markets:railwaysandsteamshipsloweredtransportcosts,andEuropemoved

towardfreetradeinthewakeofthe1860Cobden-Chevaliertreaty.Thesede-

velopmentsimpliedlargetrade-inducedpriceshocksthataffectedeveryEuro-

peanparticipant.Thedropingrainpriceswasthecanonicalcase:wheatprices

Jef:ey G. Williamson

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Figure 1. Real Wage Dispersion, 1854-1913

Coefficientof variation

3.5

3

2.5-

2-

1.5

|

0.5

?J .1

1854

1859

1864

1869

I

1

1874

1

1879

O Fullsample

O

A

SampleexcludingNorthAmerica SampleexcludingNorth America, Spain,and Portugal

1884

i

1889

I

1894

I

1899

1904

1909

1913

Note: Wage dataareurban,male,purchasing-power-parityadjusted. Source: Williamson(1996a,figure1).

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in Liverpoolwere 60 percenthigherthan those in Chicagoin 1870, for ex- ample,buttheywerelessthan 15percenthigherin 1912, adeclineof forty-five percentagepoints. The commoditypricedifferentialdeclinedby even more when the spreadis measuredfromwheat-growingregionsoutsideof Chicago.

Furthermore,pricesof all tradables,not justgrain,wereaffected.It shouldbe

stressedthattheseglobalizationpriceshockswerefarlargerthanthoseembed-

ded in the infamous1930 Smoot-Hawleytariffor anyotherU.S. tariffin the past century.3They werealso largerthan the declinein OECDtariffbarriers inducedbytheGeneralAgreementon TariffsandTradeafterthe 1940s,events whichtriggeredtheglobalizationboomof thelastquartercentury.WorldBank studiesreportthattariffson manufacturesimportedby industrialcountriesfell from 40 percentin the late 1940s to 7 percentin the late 1970s, a dropof thirty-threepercentagepoints.Wood (1994, p. 173) usesthis exampleto ad- vertisejust how revolutionaryworldcommoditymarketintegrationhasbeen in recentdecades,but eventhis spectaculardropis smallerthanthe forty-five percentage-pointdeclinein tradebarriersbetween1870 and 1913 causedby improvementsin transport. The standardtrademodel arguesthat, as countrieseverywhereexpandthe productionand exportof goods that use theirabundant(andcheap)factors relativelyintensively,theresultantmarketintegrationwouldleadto aninterna- tionalconvergenceof factorprices.Underthistheory,then,thelatenineteenth centurytradeboom accountedfor 10 to 20 percentof the convergencein GDP perworkerhourand in the realwage.4It alsohaddistributionalimplications forpoorcountries:it meantrisingwagesforunskilledworkersrelativeto land rentsand skilledwages.For richcountries,it meantthat unskilledwagesfell relativeto landrentsandskilledwages.

MigrationIssues

The correlationbetweenrealwagesorGDPperworkerhourandmigrationrates is positiveandhighlysignificant.The poorestOld Worldcountriestendedto havethehighestemigrationrates,whiletherichestNewWorldcountriestended to havethe highestimmigrationrates.The correlationis not perfectsincepo- tentialemigrantsfrom poor countriesoften found the cost of the move too high, andsomeNew Worldcountriesrestrictedinflowsof suchmigrants.But the correlationis still verystrong.Furthermore,the effecton the laborforce wasveryimportant,augmentingthe New Worldlaborf6rcebyalmost37 per- centandreducingtheOld Worldlaborforceby 18percent(atleastamongthe emigrantcountriesaroundthe Europeanperiphery),much largerthan U.S. experiencein the 1980s. One estimatesuggeststhat massmigrationsexplain about70 percentof the realwageconvergencein the late nineteenthcentury

Jeffey G. Williamson

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Figure 2. Ratioof UnskilledWagestoLand Values,1870-1913

(1911 = 100) New World 700 * Argentina - - 600 Australia - - Canada
(1911
= 100)
New World
700
*
Argentina
-
-
600
Australia
-
-
Canada
500
-
-
USA
-
-tJ
300-
200
ma
100
1870
1875
1880
1885
1890
1895
1900
1905
1910
1913
Old World,
"Free Trade"
140o
100-
/
80
/-
*i
Britain
-
-
Denmark
40-
-
-
Ireland
t
-
-
20.-
0
Sweden
1870
1875
1880
1885
1890
1895
1900
1905
1910
1913
Old World, "Protected"
140
-
120
60 I
-
France
-
-
40
30-
Germany
-
-
Spain
(1907=
100)
1870
1875
1880
1885
1890
1895
1900
1905
1910
1913

Source: O'Rourke, Taylor, and Williamson (1996, figs. 1, 2, 3)

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(Williamson1996a;Taylorand Williamsonforthcoming). This estimate,in contrastwith thecontemporarydebateaboutimmigrationin the 1980s,which focusesonly on immigrationinto Europeand the United States,includesthe totalimpacton richreceivingcountriesandpoorsendingcountries. Becausethe migrantstendedto be unskilled,andincreasinglyso towardthe end of the century,theyfloodedthe receivingcountries'labormarketsat the bottomof theskillladder.Thusimmigrationmusthaveloweredunskilledwages relativeto thoseof skilledartisansandeducatedwhite-collarworkersandrela- tiveto landrents.Theseimmigration-inducedtrendsimpliedincreasedinequality in rich countries,while emigration-inducedtrendsmust have moved in the oppositedirectionandreducedinequalityin poorcountries. So muchforplausibleassertions.Whatwerethe facts?

Establishingthe Facts, 1870-1913

How did the typicalunskilledworkernearthe bottomof the distributiondo relativeto thetypicallandowneror capitalistnearthetop,orevenrelativeto the skilledblue-collarworkerandeducatedwhite-collaremployeenearthe middle? The debateoverinequalityin the latetwentiethcenturyhasfixedon wagein- equality,buta centuryearlier,landandlandedinterestswerefarmoreimportant sourcesof income,so theyneedto be addedto theinquiry.(I believethisis true throughoutthe developingworld,certainlyits poorerparts.5)In any case,two kindsof evidenceareavailableto documentnineteenthcenturyinequalitytrends so defined:theratioof unskilledwagesto farmrentsperacre,andtheratioof the unskilledwage to GDPperworkerhour.6Everyoneknowsthatfarmlandwas abundantandcheapin the New World,whilescarceandexpensivein the Old World.And laborwasscarceandexpensivein the New World,whileabundant andcheapin theOldWorld.Thus,theratioof wageratesto farmrentswashigh in the New Worldand low in the Old. What everyonereallywantsto know, however,is how the gapevolvedovertime:Arethe trendsconsistentwith the predictionsof the globalizationandinequalityliterature?Wasthere,in Wood's language,relativefactorpriceconvergencein thelate-nineteenthcentury,imply- ingrisinginequalityin richcountriesanddeclininginequalityin poorcountries? Figure2 suppliessomeaffirmativeanswers. In the New Worldthe ratioof wageratesto farmrentsplunged.By 1913 it had fallenin Australiato a quarterof its 1870 level;in Argentinato a fifth of its mid-1880 level;and in the United Statesto less-thanhalf of its 1870 level.In the Old Worldthe reverseoccurred,especiallywherefreetradepoli- cieswerepursued.In GreatBritainthe ratioin 1910 hadincreasedby a factor of 2.7 overits 1870 level,while the Irishratiohad increasedevenmore,by a factorof 5.5. The Swedishand Danish ratioshad both increasedby a factor

JeffreyG. Williamson

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Figure 3.

Normalized Inequality Levels, 18 70-1913

Ratio of unskilled wages to GDP per worker hour

160 .

140

1O()lt-S_;

80

80

60

40 4C

1870

_

,_

1890

_

_,

.,J

_

_,

_

I

*

~~~~~~~~~~~~~~Australia

*

-

-

-,

,-

1913

E

-, -

*.

1

*

Belgium

Canada

Denmark

France

Germany

Italy

~Netherlands

_Noray

--*-~~~~~~~~~~~~~~

Q~1Spaint

 

--g-

Sweden

i

-

United Kingdom

*

United States

Note: Inequality levels are normalized by setting the ratio of unskilled wages to GDP per worker- hour at 1870 = 100. Source: Williamson (1996b).

of 2.3. The surgewasless pronouncedin protectionistcountries,increasing by a factorof 1.8 in France,1.4 in Germany,andnot at all in Spain. Becauselandownerstendedto be nearthe top of the income distribution pyramid,7thisevidenceconfirmsHypothesis1:inequalityrosein the rich,la- borscarceNew Worldandfellin the poor,labor-abundantOld World.There is alsosome evidencethatglobalizationmattered:countriesthatwereopen to tradeabsorbedthe biggestdistributionalchanges;thosethat retreatedbehind tariffwallssustainedthe smallestdistributionalchanges. Somuchforwage-rentalratios.Whatabouttheratiooftheunskilledworker's wage(w) to the returnson all factorsperlaborer,or GDPperworkerhour (y). Changesin w/ymeasurechangesin the economicdistancebetweenthe work- ing poor nearthe bottom of the distributionand the averagecitizen in the middleof the distribution. Figure3 summarizesthe widevarianceacrossthe fourteencountriesin the sample.PowerfulDanishandSwedishequalitytrendsestablishtheupperbound, 1913 = 244 (theindexrisesabove100);powerfulAustralianandU.S. inequal- ity trendsestablishthe lowerbound, 1913 = 53 (theindexfallsbelow 100).8 An alternativeway to standardizethese distributionaltrendsis simply to computethe annualpercentagechangein the indexbetween1870 and 1913, which rangesfrom+0.97 and +0.98 for Denmarkand Swedento -1.22 and -1.45 forAustraliaand the United States.It is plottedagainstthe 1870 real wagein figure4, and it offersa stunningconfirmationof the firsthypothesis:

Between1870 and 1913 inequalityrosedramaticallyin richNew Worldcoun- triessuch as Australiaand the United States;inequalityfell dramaticallyin

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poor,newlyindustrializingcountriessuchasNorway,Sweden,Denmark,and Italy;inequalityfellonlymodestlyin middle-income,industrialeconomiessuch as Belgium,France,Germany,the Netherlands,andthe United Kingdom.

TheImpactof Globalizationon Inequality rends,

1870-1913

Theorysuggeststhatglobalizationcanaccountforthiskeystylizedfact:In anage of unrestrictedinternationalmigration,poorcountriesshouldhavethe highest emigrationratesandrichcountriesshouldhavethehighestimmigrationrates;in anageof liberaltradepolicy,poorcountriesshouldexportlabor-intensiveprod- uctsand richcountriesshouldimportlabor-intensiveproducts.Theoryis one thing:factis another.What evidenceon tradeand migrationin the latenine- teenthcenturysupportsthis(apparentlyplausible)globalizationhypothesis? I startwithtradeeffects.Therewasa retreatfromtradeliberalismafter1880, and the retreatincludedFrance,Germany,Italy,Portugal,and Spain.In the absenceof globalizationforces,poorlabor-abundantcountriesthatprotectdo-

Figure 4.

Initial Real Wages vs. Inequality Trends, 18 70-1913

Average annual percentage change in inequality index

1 -

Sweden

-

Denmark

Falling

inequality

0.5

Norway

0

-0.5

Italy

Portugal

A

-

-1

A

Rising

inequality

-1.5

10

Spain

I

30

Belgium

Netherlands

France % Germany

UnitedKingdom

I

50

I

70

I

90

1870 real wage

Canada

U

Australia

UnitedStates

110

130

Note: Realwage in 1870relativeto an index where UnitedKingdom = 100 in 1905. Source: See figure3.

JeffreyG. Williamson

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mesticindustryshouldraisethereturnstoscarcefactors(suchasland)relative

toabundantfactors(suchasunskilledlabor).Inthefaceofglobalizationforces,

thesamecountriesshouldatleastmutetheriseintherelativescarcityofun-

skilledlaborandthusstemthefallin inequality.Theevidenceseemsto be

roughlyconsistentwiththesepredictions.Thatis,thecorrelationbetweenris-

inginequalityandinitiallaborscarcityturnsouttobebetterfor1870-90-an

environmentof sharedliberaltradepolices-thanfor1890-1913-anenvi-

ronmentofrisingprotectionontheContinent.9

Iturnnexttotheimpactofmassmigration.Asindicatedabove,theimpactof massmigrationonlaborsuppliesin sendingandreceivingcountriesbetween

1870and1910rangedfrom37percentforthreeNewWorlddestinationcoun-

tries(Canadaat44percentabsorbingthelargestsupplyofimmigrantlabor)to

-18 percentforsixpoorEuropeansendingcountries(Italyat-39 percentlosing thelargestshareofitslaborsupply).Migration'simpactonthereceivingcountry's

laborforceisalsoknowntobehighlycorrelatedwithaninitialscarcityoflabor,

althoughnotperfectly(HattonandWilliamson1994).Migrationisthereforea

primecandidatein accountingforthedistributiontrends.Figure5 plotsthe

Figure 5.

Inequality Trends vs. Migration's Impact on LaborForce, 18 70-1913

Averageannualpercentagechange in inequalityindex

1

Falling

inequality

0.5-

-0.5

-

-1

Rising

inequality

-

-1.5

-40

Sweden'm

Norway

Denmark

2~~

Belgium

Portugal*

Netherlands

United Kingdom U

Spain U

IGermany

France

2~~~~~~~

I

-20

l

0

United States

20

Canada

Australia

40

Migration's impact on the labor force

Source: See figure 3.

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result:whereimmigrationincreasedthereceivingcountry'slaborsupply,inequality

rosesharply;whereemigrationreducedthesendingcountry'slaborsupply,

inequalitydeclined.

Unfortunatelyit is impossibleto decomposeglobalizationeffectsintotrade

andmigrationusingthisinformationbecausethecorrelationbetweenmigration's impactandinitiallaborscarcityis so high.Yetanefforthasbeenmadeby

constructinga trade-globalization-impactvariableastheinteractionof initial

laborscarcityand"openness."Theresultisthattheimpactofmigrationisstill

powerful,significant,andoftherightsign:whenimmigrationratesweresmall,

inegalitariantrendswereweak;whenemigrationrateswerebig,egalitariantrends

werestrong;whencountrieshadtoaccommodateheavyimmigration,inegali-

tariantrendswerestrong.IntheOldWorldperiphery,wherelaborwasmost

abundant,themoreopeneconomieshadmoreegalitariantrends,justasthe

Heckscher-Ohlintrademodelwouldhavepredicted.Itappearsthattheopen

economytigersofthattimeenjoyedbenignegalitarianeffects,whilethoseamong

themoptingforautarkydidnot.IntheOldWorldindustrialcore,thiseffect

wasfarlesspowerful.Itappearsthatopeneconomyeffectsonincomedistribu-

tionwereambiguousamongtheland-scarceindustrialleadersinEuropewhere

thefarmsectorwasrelativelysmall.'0HeckscherandOhlinwouldhavepre-

dictedthisresulttoo.InthelaborscarceNewWorld,however,themoreopen

economiesalsohadmoreegalitariantrends,whichiscertainlynotwhatHeckscher

andOhlinwouldhavepredicted.Theresultisnotsignificant,however.

Overall,Ireadthisevidenceasstrongsupportfortheimpactofmassmigra-

tiononincomedistributionandasweaksupportfortheroleof trade.This empiricalexerciseexplainsabouttwo-thirdsof thevariancein distributional trendsacrossthelatenineteenthcentury.Whatforcescouldpossiblyaccount fortheremainingthird,forcesthatwerealsohighlycorrelatedwithinitiallabor

scarcityandGDPperworker-hour?Latetwentiethcenturycriticsoftheglobal-

izationthesishavearguedthattheanswerlieswithtechnologicalchange.

LawrenceandSlaughter(1993)contendthataskill-usingbiasintheUnited

Stateshasdrivenrisinginequality.Woodcountersthatitcannotbesobecause inequalityin theUnitedStatesandtheotherOECDcountrieswasontherise justwhentheslowdowninproductivitywasinfullswing.Whicheverviewthe

readerbelieves,itisimportanttorememberthatwearesearchingforanexpla-

nationthatcanaccountsimultaneouslyforfallinginequalityin theSouth,ris-

inginequalityintheNorth,andsomemixtureamongthenewlyindustrializing countriesin themiddle.Butisthereanyreasonto believethattechnological changeshouldbe unskilledlabor-savingin richcountriesandunskilled labor-usinginpoorcountries? Thisissuehasbeenexploredatlength(O'Rourke,Taylor,andWilliamson 1996)usingthedataon theratioof wagesto landrentshownin figure2.

JeffreyG.Williamson

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Almostbydefinition,industrialrevolutionsembodyproductivitygrowththat

favorsindustry.Becauseindustrialoutputmakeslittleuseof farmland,indus-

trializationinsteadraisestherelativedemandsforlaborandcapital.Industrial revolutionstend,therefore,toraisewagesrelativeto landrents.Accordingto thisprediction,morerapidindustrializationinEuropethanintheNewWorld

shouldalsohaveraisedthewage-rentalratiobymorein Europe.Suchevents

shouldhavecontributedtoaconvergenceinthepricesoffactorsofproduction, includinga risein realwagesin Europerelativeto thosein theNewWorld. Thispredictionwouldbereinforcedif productivityadvanceinthelatenine-

teenthcenturyNewWorldwaslabor-savingandland-using,astheabovehy-

pothesissuggestsandaseconomichistoriansgenerallybelieve(Habakkuk1962;

David1974;di Tella1982).Thepredictionwouldbefiurtherreinforcedif productivityadvancein theOldWorldwasland-savingandlabor-using,as economichistoriansgenerallybelieve.

O'Rourke,Taylor,andWilliamson'sresults(1996,table4)arestriking.The

combinationofchangesinland-laborratiosandcapitaldeepeningaccounted

forabout26percentofthefallinthewage-rentalratiointheNewWorld,but

fornoneof its risein theOldWorld.-Commoditypriceconvergenceand

Heckscher-Ohlineffectsaccountedforabout30percentofthefallintheNew

Worldwage-rentalratioandforabout23percentofitsriseintheOldWorld.

Advancesinproductivity,aspredicted,werelabor-savingin thelabor-scarce NewWorldandlabor-usinginthelabor-abundantOldWorld.Labor-saving

technologiesappeartohaveaccountedforabout39percentofthedropinthe

wage-rentalratioin theNewWorld,whilelabor-intensivetechnologiesac-

countedforabout51percentofitsriseintheOldWorld,powerfultechnologi-

calforcesindeed.1'Globalizationaccountedformorethanhalfof therising inequalityinrichcountriesandfora littlemorethanaquarterof thefalling

inequalityin poorones.Technologyaccountedforabout40 percentof the risinginequalityinrichcountriesinthefortyyearsbeforeWorldWarI, and

about50percentofthedeclineininequalityinpoorcountries.

Establishingthe InequalityFacts, 1921-38

WhathappenedafterWorldWarI,whenquotaswereimposedinimmigrating countries,capitalmarketscollapsed,andtradebarriersrose? First,wagedifferentialsbetweencountrieswidened.Someofthedifferences

werewar-related,andsomewereduetotheDepression,buteveninthe1920s

thetrendwasclear.Second,theconnectionbetweeninequalityandtheforces

ofglobalizationwasbroken(seefigure6).Inequalityrosemoresharplyinpoorer

countriesthaninrichercountries,whereinfourcases,itactuallydeclined.

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Figure 6.

Initial Real Wage vs. Inequality Trends, 1921-1938

Averageannualpercentagechange in inequalityindex

2

-

Falling

inequality

0

-2

-3-

.

Begu

Belgium

France

Rising

Germany

inequality

-4

-

40

,

60

.

80

*

Sweden

Australia

Italy

Norway M**Netherlands

.

100

120

1921 real wage

UnitedStates

140

Denmark

160

Note: The realwage in 1921relativeto an indexwhere the UnitedKingdom= 100in 1927. Source: See figure3.

Some ThingsNeverChange

At leasttwo eventsdistinguishthe latenineteenthcenturyperiodof globaliza- tion fromthatof thelatetwentiethcentury.First,a declinein inequalityseems to havebeensignificantandpervasivein the poor,industriallatecomersin the latenineteenthcenturysample.This move towardequalityhasnot beenuni- versallytrueof theLatinAmericanandEastAsiancountriesrecentlystudiedby otherresearchers.Second,massmigrationappearsto havehada moreimpor- tanteffectthantradeon inequalityin the latenineteenthcentury.Exceptfor the United States,and perhapsWest Germany,this phenomenondoes not seem to have been true of the late twentiethcentury,althoughit shouldbe noted thatno economisthasassessedthe impactof emigrationon wagesand inequalityin Turkey,Mexico,the Philippines,orotherdevelopingcountriesin whichnetoutmigrationhasbeensignificantoverthepastquartercenturyorso. Some thingsneverchange,and that fact impliesa warning.Globalization andconvergenceceasedbetween1913and 1950.It appearsthatrisinginequal- ity in richcountriesinducedby globalizationwasresponsible,at leastin part,

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fortheinterwarretreatfromglobalization.The connectionbetweenglobaliza- tion and inequalitywasalsobrokenbetweenWorldWar I and 1950. Rising inequalityin therichcountriesstoppedexactlywhenimmigrationwaschoked offbyquotas,globalcapitalmarketscollapsed,andtheinternationalcommunity retreatedbehindhigh tradebarriers.Are theseinterwarcorrelationsspurious? The pre-WWIexperiencesuggestsnot. Istherealessonfromthishistory?Will theworldeconomysoonretreatfrom its commitmentto globalizationjustas it did almosta centuryago?

Notes

JeffreyG. Williamsonis the LairdBell Professorof Economicsand facultyaffiliateat the HarvardInstituteforInternationalDevelopmentat HarvardUniversity.A longerand more technicalversionof this paperappearedas NBER WorkingPaper5491 and is availableon request(jwilliam@kuznets.fas.harvard.edu).The researchunderlyingthispaperwassupported by theNationalScienceFoundation.I am gratefulfor the excellentresearchassistanceof Bill Collins,AsimKhwaja,andTien Quek,aswell asforusefulcommentsfromMoeAbramovitz, Don Davis,Ron Findlay,Tim Hatton, Doug Irwin,Ed Leamer,KevinO'Rourke,Sherman Robinson,AlanTaylor,AdrianWood, and refereesof TheWorldBankResearchObserver.

1. See,forexample,BaldwinandCain(1994), Bergstrandandothers(1994), Bhagwatiand

Dehejia(1994), Bhagwatiand Kosters(1994), Borjasand Ramey(1994), Freeman(1995), FreemanandKatz(1994), KrugmanandVenables(1995), Leamer(1994, 1995), Richardson (1995), Wood (1995a, 1995b), andWorldBank(1995).

2. Before1870 thefullsampleincludesAustralia,Belgium,Brazil,France,Germany,Great

Britain,Ireland,the Netherlands,Norway,Portugal,Spain,Sweden,and the United States. After1870, the sampleincludesArgentina,Canada,Denmark,andItaly.

3. The Smoot-Hawleytariffof 1930 is infamousfor its allegedcontributionto the Great

Depression.Yettheadvaloremtariffequivalentlevelswere42.5 percentunderSmoot-Hawley, an increaseof only 8 percentagepointsoverthe levelsimpliedby the 1922 TariffAct (Irwin 1995, table 1). A tariff-induced8-percentage-pointincreaseseems tiny comparedwith a

45-percentage-pointdecreasein cost as a resultof decliningtransportchargesbeforeWorld WarI-one-sixth the magnitudein fact!

4. Commoditypriceconvergenceaccountsforaboutthree-tenthsof realwageconvergence

betweenthe UnitedStatesandBritainduringthe twenty-fiveyearsafter1870 andaboutone-

tenth of the convergencebetweenthe United Statesand Swedenoverthe fourdecadesafter

1870;however,Anglo-Americancommoditypriceconvergenceeffectswereswampedbyother

forcesafter 1895,

convergenceover the four decadesas a whole (O'Rourkeand Williamson 1994, 1995). O'Rourke,Taylor,andWilliamson(1996) turnedto econometricanalysisofwage-rentaltrends in sevencountries(includingBritainandSweden)to searchforthe averagecase.They found thatcommoditypriceconvergencecouldexplainabouta quarterof wage-rentalconvergence

betweenthe New Worldandthe Old World.Theseestimatesarecloseto the 10-15 percent reportedby Richardson(1995, p. 36) for the contributionof tradeto risingUnited States inequalityfromthe 1970s.

and they made only a modest contributionto Anglo-Swedishrealwage

5. AsfarasI amaware,recentstudiesof theglobalization-inequalityconnectionin develop-

ing countriesfocusalmostexclusivelyon wageinequality,andsometimesonlyon urbanwage inequality.I thinkthisis a big mistakeforcountrieswhereruralwageemploymentis signifi-

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cant andwherelandedinterestsarepowerful.Surelythe economicpositionof landlordsand rurallabormattersin economieswhereagricultureis one-fifth,one-quarter,or evenone-third of the economy.

6. O'Rourke,Taylor,andWilliamson (1996) constructeda paneldatabasedocumenting

the convergenceof the ratioof unskilledwagesto farmrentsper acreamonglatenineteenth centurycountries(figure2): fourNew Worldcountries-Argentina,Australia,Canada,and the United States;four free-tradeOld World countries-Denmark, GreatBritain,Ireland, and Sweden;andthreeprotectionistOld Worldcountries-France, Germany,and Spain.

7. This wascertainlytrueof Europe,Argentina,and theAmericanSouth,but lesstruefor

the AmericanMidwestand Canada,wherethe familyfarmdominated.

8. The equalityindexis normalizedby settingwly1870 = 100.

9. In addition,the slopeon an estimatedinequality-real-wageregressionline is farsteeper

in 1890-1913 withoutthe protectedfive (France,Germany,Italy,Portugal,andSpain)than with them.We sawthe samecontrastwhen comparingwage-rentalratiotrendsbetweenfour Old World countrieswith free tradeand threeOld World countriesthat areprotectionist

(figure2).

10. This was nottrue in Englandduringthe 1830s when the Corn Lawscan be shownto

havehad inegalitarianimplicationsand thus that repealhad egalitarianimplications(Irwin

1988;Williamson1990; O'Rourke1994). Englandhad a verydifferenteconomicstructure and mix of politicalinterestgroupsin the 1830s comparedwith the 1880s, a half century later.

11. The residualwas 5.1 percentforthe New Worldand27.5 percentfor the Old.

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