Script_04 PDF History of Economics and the Economy IV

History of Economics and the Economy IV Free markets, the first globalization and the great specialization “By 1913, international commodity markets were vastly more integrated than they had been in 1750, world trade accounted for a far higher share of world output, and a far broader range of goods...

History of Economics and the Economy IV Free markets, the first globalization and the great specialization “By 1913, international commodity markets were vastly more integrated than they had been in 1750, world trade accounted for a far higher share of world output, and a far broader range of goods, including commodities with a high bulk-to-value ratio, were being transported between countries. These trends, in combination with rapid industrialization in northwest Europe and the British offshoots, had a dramatic impact on the worldwide division of labour, as Europe outcompeted its rivals elsewhere. By the late nineteenth century there was a stark distinction between industrial and peripheral economies: the ‘Great Specialization’, as Dennis Robertson once memorably termed it (Robertson 1938, p. 6).” ▪ Findlay/O’Rourke (2007, p. 411) Contents of this chapter 1. First Globalization – What? 2. Great Specialization – What? 3. First Globalization and Great Specialization – Why? 4. First Globalization and Great Specialization – Consequences 5. Bibliography 1. First Globalization – What? Outline and increase in trade shares in outputs and consumption/ inputs https://ourworldindata.org/grapher/globalization-over-5- Source: Federico and Tena-Junguito (2017), centuries-km , probably also used in Crespo/Essletzbichler http://hdl.handle.net/10016/22355 Takeaway: between 1840s and early 1900s trade grew faster than ever before, and also faster than world GDP (which also grew faster than ever before). This is when the idea of “progress” (week 1) became mainstream. The period 1918-1950 created doubts about it. 1 Definitions of economic globalization market integration How can we define and measure globalization? We focus on economic globalization In economics: globalization = market integration Geographically, we look at how extended markets are by identifying “integration areas”, in which market exchange actually takes place. This can differ from commodity to commodity, and across time, from the ‘traditional’ village level to the global economy Globalization and market integration involves… Exchange of products special commodities, like pepper and silk, gold and silver everyday commodities like bread (or wheat, rice, maize, sorghum) services like financial and legal counselling, haircuts, transport Movement of factors of production labour = migration capital = foreign investment land = ??? [conquest and settlement ~ migration) All of this has political, social, cultural, regulatory, etc., implications Globalization as market integration depends on availability of goods to trade and demand for them (availability of a surplus over own consumption for trade, availability of excess demand for not self-produced products) transformation costs (converting inputs into outputs) – if costs are the same everywhere, trade probably makes no sense. transaction costs (transport costs, costs of information about products and their characteristics, negotiation and contract enforcement costs) How to measure globalization as market integration? as more trade and movement (more migration, more international investment)? Just comparing absolute quantities of goods (and production factors) moving across borders might be misleading: economic growth might lead to more imports at the same (or even lower) marginal spending of imports as share of imports (goods consumed, but not produced at home) and exports (goods produced, but not consumed) in gross domestic product [see graph on p. 1]? Might again be misleading: when incomes rise the share of income spent on (not so easily tradeable) services increases, etc. as similarity of prices between different locations: Law of one price! ideally, all prices should be the same everywhere (that is the idea behind a no-frictions [world] market modelled in microeconomics and the Walras system of equations [HET text!]), such an equilibrium between places separated by distance is rarely attained, although it acts as an ‘attractor’ (something like the ‘natural price’ of Adam Smith, but with a spatial dimension). Equilibrium is seldom reached because of o high transport costs o information asymmetries o slow adjustment times when prices diverge (slow/expensive information and transport) When prices trade and exchange is inhibited: excess supply or demand in each partial market lead to price differences, no equilibrium across space, no market integration. 2  weak law of one price: there are transaction (transport, etc.) costs, but prices move jointly at different levels, because trade is taking place, but not eroding all price differences. Markets are incompletely integrated (not same price level, but same price movement) What inhibits market integration? A closer look at trade and transaction costs: Transaction costs information costs (on existence of products, prices, measures, quality) Risk of transaction concluded, but not paid for Property rights (can we make sure something is ours?) Transport costs Of transporting the merchandise (and of arriving on time) Of being robbed (or of boat sinking, caravan getting lost…) Financial risk Risk of commercial credits not being paid back No ability to get credit (no banks, no savings, no lenders) Opportunity costs (instead of trading, we can do something else with the money) Trade costs as reasons for price differences A simple two-market model of market integration for a homogeneous good, produced with the same technology, we call it “wheat” If the trade costs fall (here, they disappear completely) there is possibility of arbitrage:  a part of US production (lower autarky/no trade price) will be exported to the UK (higher autarky/no trade price)  due to trade SUSA moves to the left (less domestic supply), SUK to the right (more domestic supply)  the US and UK prices unite in one unique world price, Pworld (higher than PUS, lower than PUK) 3 Examples of price convergence for everyday goods: wheat across the Atlantic, since 1750: In real life over time: Wheat price ratio US East Coast and UK, 1750-1900 (on p. 3: PUS/PUK) Around 1775: American War of Independence (from UK!) When this ratio is below 1, UK price is higher than US price, when they approach 1, prices equalize: sign of market integration. Source: Federico (2011) In detail: Wheat prices in US and UK 1700-1900 Source: Sharp and Weisdorf (2013) 4 Similar prices or similar production costs? Trade volumes for the same period (UK imports of US wheat; the red part of the horizontal Q-axis on p. 3) Looks like a lot of trade in 1775, but the scales are very different. But if we put both on the same scale, it looks more or less like below - It’s not really the same scale – 2 mio. on the right are the same as 200,000 on the left, but left would become invisible if reduced to one tenth… Source: Sharp and Weisdorf (2013). Quarter is a measure for amount of wheat (¼ hundredweight) equal to 12.7 kg. 5 Zooming into the period after 1800: Price ratios London – New York and Paris – New York (for wheat, 1806-1913) These are price ratios, London/Paris price divided by New York Price (contrary to p. 4, upper part, now European price is divided by US price to see how much higher European prices are [remember Adam Smith, Rev. Malthus and the American colonies] Source: Homepage David Jacks, https://davidjacks.org/miscellaneous-price-data/ For context: Remember session (1 & 2): slow market integration for “special goods”: Pepper prices in England and in India, 1450-1750 Source: Allen (2011), p. 18. 6 Remember session 2: European market integration after 1500/1600 for everyday goods: Price ratios for rye: Price in the Netherlands (Groningen) divided by price in Baltic Sea area (Gdansk), 1500-1800 Source: Price database Robert C. Allen; W. Tijms, Groninger Graanprijzen (Groningen 2000); Ratios of decadal averages of prices in grams of silver per liter. Shaded area: interpolated (no data). Remember the pepper price example in session 1. The technique here would be dividing England prices by India prices in that graph. 7 2. Great Specialization – What? Europe (“core”) exports manufactures, almost everybody else (“periphery”) primary goods (such as wheat) Regional participation in world trade: Northwestern European/US ‘core’ and Rest of world ‘periphery’ Taken from Graff, Kenwood and Lougheed (2014), p. 84. Great specialization: ‘Core’ industrialized Northwest-Europe including UK plus US exports almost all manufactured products in the world and imports a large share of raw materials from rest of the world (‘periphery’) 8 Extremely specialized “peripheral countries” What and how much the others export: the specialized and globalized periphery (pick your favourite) Source: Williamson (2011), p. 47, 52. “Peripheral” countries often depend for their export on just a few commodities. The extreme case would be Cuba, where in 1913, 45.3% of all domestic production is exported, and these exports consist of only sugar and tobacco. The countries where the ‘globalization shock’ after 1870 is largest, are Japan (see below), Indonesia (a Dutch colony organized for sugar and coffee exports), Thailand (Siam, similar experience), Italy (but with a much more diversified economy) and Colombia (coffee boom). The most open ‘peripheral’ economies in 1913 were, besides Cuba, Egypt (dependent on raw cotton exports), Argentina (wheat and wool), Brazil (coffee and rubber), Uruguay (wool and hides) and Chile (nitrates and copper). Note that some of the peripheral countries were much less open than these (e.g., China, Italy, Russia), so the overall dependence of export-oriented primary good production had a lower incidence on their economies. Japan was the only peripheral country that exported manufactured goods (cotton goods) due to its own industrialization process from the 1870s. 9 3. First Globalization and Great Specialization – Why? 1. The origin and spread of industrialization and its technologies Remember week 3: The conventional story sees this process starting in the United Kingdom, more precisely in Northwest England, in Lancashire, from around 1750, with technological innovations in a few industries, especially cotton spinning and weaving, coal mining, and ironmaking. Initially, these sectors were rather small, but they grew fast and gained in importance. This was accompanied by the rise of a new sort of cities, built around factories. This reinforced also the older division of labour between cities and countryside (see class 2) and the UK/Lancashire and the ‘rest of the world’ (food and raw material provision for workers and machines). This process then spread slowly to other industries in Britain and to Belgium, France, Switzerland, Germany, US, etc, creating global ‘core’- ‘periphery’ patterns (see class 4). …industrialization spread beyond the UK In 1982, Paul Bairoch reconstructed levels of industrialization, and benchmarked them to the UK level in 1900. The basis of these calculations are, for example, cotton spindles and pig iron production divided by population levels. A number equal to or larger than 16 means therefore ‘industrialized as much or more than UK in 1800’. The “Periphery” (China, India, Brazil, Mexico, also Russia, Spain, parts of Italy and Austria-Hungary) industrialized slowly or “deindustrialized” – compare to p. 9). Source: Findlay/O’Rourke (2007, p. 323). Originally from: P. Bairoch (1982), “International industrialization levels from 1750 to 1980,” Journal of European Economic History 11, pp. 269-331. Based on occupational censuses as part of population censuses, Bentzen, Kaarsen, Wigender (2013) have reconstructed the point at which the share of population working in manufacturing exceeded that working in agriculture for the first time in different countries. For some countries, the first available census data is rather late, in some countries (e.g., Argentina), the share of agriculture returns to exceed the share of manufacturing again after the date provided. Like the Bairoch data above, the following table should thus also be taken as indicative. 10 Share of employment in industry higher Later industrializers than in agriculture before 1913 France (1950) United Kingdom (since before 1801) Italy (1961) Belgium (since 1884) Japan (1962) Switzerland (since 1891) Spain (1969) Germany (since 1896) Portugal (1977) Argentina (since 1897) Taiwan (1979) Netherlands (since 1897) South Korea (1984) New Zealand (since 1902) Brazil, Turkey (2005) Australia (since 1905) China, India (not by 2005) United States (since 1911) Source: Bentzen, Kaarsen, Wigender (2013). How trade helped the industrial revolution: supply of raw materials, demand from global markets The role of trade in this Price for cotton cloth Price for raw cotton Price for exports/imports terms of trade= price of exports/price of imports Source: Allen (2011, pp. 59-60, upper left and middle); Williamson (2011, p. 32, upper right); Findlay/O’Rourke (2007, p. 322, lower panel). (a) Provide raw materials and foodstuffs to core – UK imports of raw cotton (for the spinning machines in the factories) grew very quickly (cotton is an extreme case, but illustrative) – see lower panel – steep increase in raw cotton imports in Britain since 1750. At the same time the price of cotton in Britain (Liverpool) became very similar to that in a India (Gujarat), one place 11  of production. This happened thanks to market integration (transport improvements, initially copper sheets on wooden ships, better packing technologies for cotton bales) and the increase in cotton growing in many places (most prominently, in the slave plantations of the US South, but also in Egypt, see p. 9). In consequence – technological advances (class 3) decreased the price of British cotton cloth (upper left panel) below that of Indian hand-made cotton, without rising raw cotton prices (see week 3), which ceteris paribus would have been the consequence of increasing demand. (b) Access to markets abroad enables selling rapidly growing domestic output abroad even when domestic demand cannot rise as fast –> prices do not fall too much even when supply exceeds demand at home (-> incentive to actively search for markets) – British terms of trade fall between 1800 and 1830, but stabilize then; the ‘periphery’ benefits from moderatly increasing raw material prices (which are in part a consequence of decreased ‘losses’ from transaction costs), but mostly from technologically induced falling prices for industrial goods (and their transport). So, decreasing the ‘wedge’ of transport and transaction costs (p. 3) makes raw materials cheaper in the industrializing ‘centre’ and manufactured goods cheaper in the ‘periphery’. Technological advances as part of industrialization increase efficiency and the amount produced, inclusion of new land, new crops, intensification of production increases the corresponding raw material and food output – and the incomes from it provide a market for manufactures. Without cheaper transport and increased raw material provision, the industrial revolution might have run out of steam. But with it, it converted the town- country hierarchy that emerged in England first into a global phenomenon – the Great Specialization. 2. Falling trade and transaction costs: “distance shrinks” innovations like steam ships and iron/steel hulls, railways, denser connections, better communications (telegraphs) made trade costs fall This benefitted both the core and the periphery: the difference in prices between export prices in one country and import prices in another country decreased. This meant that prices could rise for exporters and fall for importers at the same time because the “wedge” (see p. 3, and p. 11 upper right panel) became smaller, i.e., markets integrated That allowed core’s terms of trade to fall relatively little (as they churned out more and more industrial goods), and pheriphery terms of trade to increase a lot. Specialization became more feasible. Industrial revolution innovations (here: steam engines) improve transport (week 3) The Rocket, George & Robert Stephenson, 1829, RMS Titanic, leaving Southampton in 1912 with steam basically a 21 HP high pressure steam engine engines producing up to 46,000 HP under deck; FGO on wheels; Wikimedia. Stuart/Wikimedia. 12 Dramatic decrease in shipping costs (here for coal, very similar for wheat) Source: O’Rourke and Williamson (1999), p. 36 Shorter distances: Suez and Panama Canals (due to European/US investments) opened in1869: distance London-Bombay falls opened1914, reduces New York-San Francisco from 10,667 to 6,274 (41%) sea miles, London- from 13,135 to 5,262 sea miles (60%), Hongkong from 13.180 to 9.799 (26%) Liverpool-Valparaíso from 8747 to 7207 (18%) Faster and cheaper letters From about 1850 telegraphs come in for many connections, but Source: Lampe (unpublished, 2013): Las relaciones they are very expensive! Kaukiainen (2001) internacionales del Servicio de Correos y Telégrafos, 1850-1936. 13 3. Trade policy liberalization UK first, and then many of the other industrializing economies (especially until the 1870s) removed long-standing mercantilist policies (such as the Navigation Acts), lowered tariffs on imports, and removed non-tariff barriers – this reflects the increasing traction of the belief of the classical economists following Ricardo in the benefits of free trade. The industrializing countries also used their advanced military technology to “open” peripheral economies (like China, Japan, Turkey) or to conquer them right away (like India and much of Africa) Tariff duties on wheat in Britain and imports of wheat (the Corn Laws until their abolition in 1846) AVE: Ad-valorem equivalent of tariff level (specific tariff duty to be paid in percent of British wheat price, “AVE”, right axis) and British imports of wheat as these duties decline (in 1000 quarters, see p. 5). On the Corn Laws see Sandmo chapter 4 for week 3 History of Economic Thought. Source: Sharp (2009), https://www.economics.ku.dk/research/workingpapers/phdseries/phd-series_2007-/PSharp.pdf, 28, 30. Ad valorem tariff equivalents of manufactured goods: Rest of the World, 1846-1880. Ad-valorem equivalent of tariff level (AVE) for industrial products in different countries, 1846-1880. Tena, Lampe, Tâmega (2012), p. 725. ‘Rich Europe’ includes countries like the Netherlands, Germany, France, Denmark. ‘EuroPeriphery’ includes countries like Spain, Portugal, Romania and Russia. ‘Poor independent’ includes most Latin American countries. Rich semi- independent includes e.g., Australia and Canada; ‘Dependent and compulsorily liberalized’ includes China, Japan, and many colonies, e.g., India. Liberalization is near-uniform until 1860s. The US gets very protectionst with starting with the Civil War (which is also a war of a protectionist, industrialized North against a free-trading, agricultural South), many countries follow – or protect in consequence of the stronger globalization wave of 1870s. 14 Example: The opening up of Japan after 1853 Forced! Trade openness leads to price increases for exportables (silk) and decreases for goods that can better be imported (cotton yarn/cloth, sugar). Japanese 1854 print (taken from Wikimedia) showing US Navy Commodore Perry’s 1853 expedition to the bay of Tokyo (then Edo) with four cannonboat steamships, where he delivered some blank canon shots (allegedly to celebrate the US Independence Day) and delivered a letter from President Fillmore asking to open Japanese ports for foreign trade (ending a 220 year period of seclusion of the country, in which only indirect trade with Japan was possible). He forced his way to meeting Japanese officials by threatening to bombard Edo/Tokyo if not allowed to go on land. He returned in 1854, and the Japanese virtually accepted all his demands, after he announced that he would not leave without a treaty. This led to the opening of ports and the signature of a wider trade agreement (the Harris Treaty of 1858) that allowed imports at modest tariff rates, other European countries followed soon with similar treaties. This is virtually the only well-documented event of a country openining from autarky to trade, similar to what is depicted on p. 3 above. In a series of papers, most notably Bernhofen and Brown (2004), Bernhofen and Brown have examined whether conventional trade theory can explain what happened after Commodore Perry’s extortion: Assuming that virtually no trade took place before 1853, ‘net exports in 1869’ show the evolution of Japanese trade patterns (and thus, revealed comparative advantage) in the 15 years after 1854. Cotton yarn was imported much more than exported, the contrary being the case for silk. The prices of imported goods fell, those of export goods rose, in line with p. 3. Source: Bernhofen and Brown (2004) Japan learned a lesson from its relative defenselessness: That a strong military and navy are important for the survival of the political elite (the opening of the country was accompanied by a Civil War, that had started before) and the independence of policy making from foreign countries. For that, Western armies and navies were copied, and industrialization was incentivized (see the pattern on p. 10). A side effect was Japan becoming an imperial power in Korea, and later in China and South East Asia, like the Western powers that had opened it (in WW2, Japan entered an alliance with the worst of them, Germany). 15 4. The Gold standard created stable exchange rates for international trade and investments Source: Obstfeld and Taylor (2004), p. 26. The gold standard before 1913 Traditionally, as discussed in week 1 (Kishtainy chapters 2-4) most money was ‘commodity money’ in the form of coins of silver, or parallel use of gold and silver (bi-metallic standard), which however suffered from the need to keep the market price for gold and silver constant. The gold standard as it emerged in the 19th century began with the initial adoption by England in the early 18th century (formally in 1844, rather long story, starting with Isaac Newton as Master of the Mint). Initially, few followed (Portugal in 1854). Germany switched to the Gold standard after unification in 1871, using the reparations from the Prussian-French war of 1870-71 to back the new national currency (Mark) in Gold (the German Zollverein had been on a silver standard). From there more and more countries trading with Britain and Germany joined the Gold standard. For trade and finance, the gold standard implied fixed exchange rates and thus lower transaction costs of currency exchange, currency fluctuations (and price comparison). How did this work? Well, different country’s currency laws defined the value of the currency in relation to a legally fixed rate in terms of gold (the “mint parity”), e.g., 2790 German Mark (of 1875) or 2480 Danish/Swedish/Norwegian kroner for 1kg of pure gold. This automatically gives a reference exchange rate: 2790/2480 = 1.125 Mark/Krone. To assure that people trusted in the convertibility of money into gold, (note) banks had to establish a minimum ratio between the deposits and notes in circulation and their gold reserves (e.g., 30%), if not, people would have preferred to have gold and “run the banks”. To make this work as an international “regime” of fixed exchange rates, gold has to be freely tradable, within and between countries (so banks can get reserves and people can convert money into gold and gold into money). If several countries do the same, the mint parities of the different countries establish fixed exchange rates around the mint parities and the transaction costs of shipping gold between countries (here: 1.125 Goldmarks per crown +/- c. 0.5% transaction costs). Because sticking to the gold standard required (especially in the periphery) following the rules of solid monetary policy (no use of printing press to finance government expenses, i.e. no “fiscal dominance” of the note-issuing bank) and balanced government budgets (to avoid the rumor that these would be ‘fixed’ by money printing or excessive government bill purchases by note-issuing banks), being on the gold standard also became a “seal of approval” for “good housekeeping” (sticking to the rules, which supported stable market conditions). 16 The political environment of the 19th century helped the gold standard to achieve this. The ‘liberal’ order (laissez-faire) made prices and wages very flexible, so unemployment was not such a political problem – workers had to absorb the shocks of business cycles, but had little political say (there was also basically no welfare state!), and adjustment fell on workers and on farmers (who often needed credit and had to pay back at falling prices if deflation was instituted). Labour movements (trade unions) were often prohibited (contracts were to be individual, not collective), in many countries only people with a minimum wealth could vote. The long period of peace helped to avoid demands for printing money to cover costs (military budgets were historically the main expense of governments), it also made international coordination between central banks and government institutions relatively easy – and this enabled a management of the gold standard outside the official rules in times of crisis. All this was not necessarily true for all peripheral countries/regions, although those under formal empire control might have been more subjected than those who were ‘more independent (in Latin America. Greece, etc.), but had to pay for instability (in part by accepting fiscal control by private investors after external defaults and ‘bad housekeeping’). 5. Peace (in Europe): less violence and disruptions to trade Before 1815, Europe was at war most of the time. Main reasons for larger trade costs Embargoes (can’t trade with the enemy) Privateering (state-backed pirates, such as Francis Drake), substituting for real and costly Navies (and sometimes staying as pirates – and there were also real pirates especially in the Caribbean and in different parts of Africa) Merchant ships forcefully converted into warships in wartime Highly increased uncertainty See impact of wars on transatlantic wheat price differences on pp 4-7: Seven Years’ War, American War of Independence, French Revolutionary and Napoleonic Wars, US Civil War, First World War, etc. British hegemony of the seas after 1820 helped to control all that. 6. Imperialism, external and internal European countries did not just trade peacefully with the rest of the world, they continued to search exclusive market and raw material access also after 1800, with a strong push in that direction since the 1870s, at the same time as the post-1870 wave of global market integration happened. In Asia, domination remained (Java, etc.) and was extended (British in India and South East Asia – Burma, Malaya, French in South East Asia – Indochina) Africa was object first of private companies and “divided up” by Europeans in 1878 (with Germany and Belgium getting minor shares, and France and UK much of the rest) America remained much outside this scramble, in part due to the Monroe Doctrine, but markets were opened anyway to foreign capital. Richer countries (France, UK) got bigger shares, poorer ones lost some (Spain) or were lucky (Portugal), and scrambled for something (Spain in Morocco, Italy in Libya and Ethiopia/Somalia). 17 Some acted closer to home (Russia [East and Central Asia, Finland, Bessarabia], Japan [Korea, Formosa, Manchuria]), US (see below) US (full of Europeans) is seen as ‘different’ although it bought possessions (from France, Spain, Russia, Sweden, Denmark), incorporated Hawaii and conquered from Spain and, more importantly, from Mexico and indigenous territories. Europe increased the proportion of the Earth’s surface it controlled from 37% in 1800 to 67% in 1878 to 84% in 1914 (Headrick 1981). The British Empire (ca. 1920) in red, and others in other colours, Japan and the US are also coded. Taken from http://www.atlasofbritempire.com/; by then the few German colonies were under British and French control. Internal imperialism US: the conquest and incorporation of territories in the Midwest and West (from indigenous populations) and the Southwest (from Mexico) Argentina: conquest of the Pampas (1870s-) Australia and New Zealand: taking over territories from indigenous populations. Russia: consolidation of power beyond Caucasus, Transsiberian Railway, etc. Similar processes also happened in Southeast Asia and other parts that were not directly under European control, but under strong indirect influence (e.g., Siam/Thailand). In European colonies indigenous populations were lured/forced into market production (e.g., peanuts in West Africa) by taxation (to be paid in money), and in general the reach of colonialism into the territories was strengthened a lot by new military technologies, railways and telegraphs. 18  Cultivated areas in the US (1850) Cultivated areas in the US (1890) Fuente: University of Texas, http://www.lib.utexas.edu/maps/ Fuente: University of Texas, http://www.lib.utexas.edu/maps/ 7.International migration helped internal and external imperialism and put suitable cultivation areas into productive use Number of transnational migrants in the World and share of emigrants in world population, 1850-2000. Source: EMIG-dataset by Jonathon Moses, formerly at http://www.svt.ntnu.no/iss/Jonathon.Moses/EMIG/index.htm Migration cycles in the 19th Century („Age of Mass Migration“, 1870s-1910s) Source: McKeown (2004). 19 Transatlantic migration: million total emigrants and percent of total 1821-1915 Source: Graff, Kenwood, Lougheed (2014), p. 54. Destinations of European migrants, 1821-1915 Source: Graff, Kenwood, Lougheed (2014), p. 56. 20 8. International investment provided the means for extension of transport infrastructure, imperialism and export-oriented agriculture Source: Obstfeld and Taylor (2004), p. 28, based on “introspection”. More than 90% of these international investments came from the industrializing areas of Western Europe that needed raw materials and had ‘exported’ populations (p. 20) and went to the places where these went – places that developed into relatively rich raw material exporters (North America, Europe, Latin America (Argentina, Brazil), Oceania). Foreign investments (stock in 1914) mostly came from Europe… Source: Graff, Kenwood, Lougheed (2014). 21 …and went to the same places where emigrants went (plus other European countries). Source: Graff, Kenwood, Lougheed (2014). Why invest abroad? Same reason as with commodity export or migration. Capital scarcity and investment opportunities in newly settled areas bring higher rates of return! Source: O’Rourke and Williamson (1999), p. 228. Investments mostly where Europeans migrated. Here, institutional frameworks were similar to Europe (often even including the gold standard and the aim for fiscal discipline, pp. 16-17) Some even part of the British Empire (Australia, New Zealand, Canada) Populations were on average much younger, and therefore did not have as many savings recent migrants who had spent their savings on travel and setup 22  fertility rates, i.e., ‘dependency rates’ (children per adult) were high and savings relatively low [remember Adam Smith and the American colonies/class 2] Since there was enormous need for infrastructure (housing, transport, …) these societies needed more capital than they could generate themselves so, interest rates (rates of return on investments) were high But since they were abundant in land (and other natural resources), had a quite secure institutional framework and were productive, potential benefits of investments were high. In other places (India, Africa, etc.) investments were relatively smaller and followed military-strategic reasons or connected resource-rich areas (mines...) to ports, etc. China, for example, beyond forcefully opened treaty ports (like Hongkong and Shanghai) was not a major destination for investments. 4. First Globalization and Great Specialization – Consequences Eric Hobsbawm (1987, pp. 16, 48) summarizes the core-periphery world that emerged in the 19th Century for us: The main source of growth in the 19th Century was the spread of industrialization, with its pull-effect on food and raw material producers. “These [industrializing] countries thus formed the bulk of the world’s economy. Between them they constituted 80% of the international market. What is more, they determined the development of the rest of the world, whose economies grew by supplying foreign needs. What would have happened to Uruguay or Honduras if they had been left on their own devices, we cannot know.” “While the (smaller) first world, in spite of its considerable internal disparities, was united by history and as common bearer of capitalist development, the (much larger) second world was united by nothing except its relations with the first, i.e. its potential or actual dependence.” Despite enormous differences between stone age societies on the Pacific Islands and old empires in China or Persia, “Basically they were all equally at the mercy of the ships that came from abroad, bringing their cargoes, armed men and ideas against which they were powerless, and which transformed their universes in ways which suited the invaders, whatever the sentiments of the invaded.” 23 5. Bibliography Findlay, R., O’Rourke, KH. (2007). Power and Plenty. Princeton University Press, chapters 6 and 7. Allen, R.C. (2011). Global Economic History. A Very Short Introduction. 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