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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
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Globalizationand
Inequality,
and
Present
Past

JeffreyG. Williamson
Thelate nineteenthand late twentiethcenturiessharedmorethanglobalization
Thetrendtowardglobalizationin bothcenturieswas
and economicconvergence.
accompaniedby changesin the distributionof incomeas inequalityrosein rich
countriesandfell in poor ones.Betweenone-thirdand one-halfof the risein inequalitysincethe 1970s in the UnitedStatesand othermembercountriesof the
and Development(oEcD)hasbeenattribOrganizationofEconomicCooperation
utedtoglobaleconomic
forces,aboutthesameas a centuryearlier.It appearsthat
theinequalityproducedbyglobaleconomic
forcesbeforeWorldWarI wasresponsiblein partfor the retreatfrom
globalizationafterthe war. Whatdoesthisretreat
Willtheworldeconomyonceagainretreatfrom
implyforthefiuture?
globalization
to cushionthesideefectsof
as therichOECDcountriescomeunderpoliticalpressure
risinginequality?

Economicgrowthafter1850 in the countriesthatnow belongto the Organization for EconomicCooperationand Development(OECD) can be dividedinto
threeperiods:the late nineteenthcenturybelle epoque,the darkmiddleyears
between 1914 and 1950, and the late twentiethcenturyrenaissance.The first
and last epochswere characterized
by rapidgrowth;economicconvergenceas
poor countriescaught up with rich ones; and globalization,markedby trade
booms,massmigrations,and huge capitalflows.The yearsfrom 1914 to 1950
are associatedwith slow growth, a retreatfrom globalization,and economic
divergence.Thus historyoffersan unambiguouspositivecorrelationbetween
globalizationand convergence.When the pre-WorldWarI yearsareexamined
in detail, the correlationturns out to be causal:globalizationwas the critical
factorpromotingeconomicconvergence(Williamson1996a).
Because contemporaryeconomists are now debating the impact of the
forcesof globalizationon wage inequalityin the OECD countries,the newly
liberalizedLatinAmericanregimes,and the EastAsian "tigers,"it is time to
The WorldBankResearchObserver,vol. 12, no. 2 (August1997), pp. 117-35
C 1997 The InternationalBank for Reconstructionand Development/ THE WORLD BANK

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1 17

ask whether the same distributional forces were at work during the late
nineteenth century. A body of literaturealmost a century old arguesthat
immigration hurt American labor and accounted for much of the rise in
income inequalityfrom the 1890s to World War I. The decision by a laborsympathetic Congress to enact immigration quotas shows how important
the issue was to the electorate.An even older literaturearguesthat cheap
grainexportedfrom the New World erodedland rentsin Europeso sharply
that landowner-dominatedcontinental parliamentsraisedtariffsto protect
domestic growers from 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,andthe UnitedStates.Inequality
fell in resource-poor,labor-abundantagrarianeconomies such as
Ireland,Italy,Portugal,Scandinavia,and Spain.Inequalitywas more
stableamongthe Europeanindustrialleaders,includingBritain,France,
Germany,and the Lowlandcountries,all of whom fell in betweenthe
richNew Worldand poor Old World.
Hypothesis2: If the first hypothesisis true, a second follows: these
inequalitypatternscan be explainedlargelyby globalization.
Hypothesis
3: If this secondhypothesisholds, then theseglobalizationinducedinequalitytrendshelp explainthe retreatfrom globalization
between 1913 and 1950.
This articlereviewsthe historicaldebateaboutthe firstglobalizationboom
in the late nineteenth century and attempts to tie it to the currentdebate
about the globalization boom in the late twentieth century. The two debates are strikinglysimilar.They also sharea shortcoming in the empirical
analysis:nobody has yet explored this issue with late nineteenth century
panel data acrosspoor and rich countries, and, with the important exception of Wood (1994), few have done so for the late twentieth century debate either (Burtless1995, p. 813). Indeed, until veryrecently,most economists had focused solely on the American experience. The central
contribution of this paper is to explore a databasefor the late nineteenth
century that includes both rich and poor countries or, in the modern vernacular,North and South.
It appearsthatglobalizationdid contributeto the implosion,deglobalization,
and autarkicpolicies that dominatedbetween 1913 and 1950. Indeed, during these yearsof tradesuppressionand binding migrationquotas, the connection betweenglobalizationand inequalitycompletelydisappeared.It took
the globalizationrenaissanceof the early 1970s to renewthis old debate.
1 13

The WorldBankResearchObserver,vol. 12, no. 2 (August1997)

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Globalizationand Inequalityin the Lateiventieth Century


From1973through
the 1980s,realwagesof unskilled
workers
in theUnited
Statesfellasa resultofdeclining
andanincreasing
productivity
growth
disparityinwagespaidtoworkers
withdifferent
skills(Kosters
1994;Freeman
1996).
Thisdifference
wasmanifested
withadprimarily
byhigherwagesforworkers
vancedschooling
andage-related
skills.Thesametrendswereapparent
elsewhereintheOECDin the1980s,buttheincrease
inwagegapswastypically
far
smaller.Thewideningof wageinequalities
coincidedwiththeforcesof global-

ization,bothin theformof risingtradeandincreased


thelatter
immigration,
characterized
byadeclinein theskilllevelsofmigrants
(Borjas
1994).Tradeas
ashareofgrossnational
intheUnitedStatesincreased
product
from12percent
in 1970to 25 percent
in 1990(Lawrence
andSlaughter
1993),whileexports
fromlow-income
countries
rosefrom8 percent
of totaloutputin 1965to 18
in 1990(Richardson
percent
These
1995,p.34).
coincided
developments
with
a shiftin spending
thatresulted
in largetradedeficitsin theUnited
patterns
States.
Thestandard
Heckscher-Ohlin
trademodelmakesunambiguous
predictions:
everycountryexportsthoseproductsthatuseabundantandcheapfactorsof

production.
Thusa tradeboominducedbya dropin tariffsor in transport
costswillcauseexports
andthedemand
forthecheapfactorto boomaswell.
Globalization
in poorcountries
shouldfavorunskilled
labor;globalization
in
richcountries
shouldfavorskilledlabor.Lawrence
andSlaughter
(1993)exploredthiswageinequality
andconcludedthattherewaslittleevidenceto sup-

portthestandard
trademodelexplanation.
theauthors
Instead,
concluded
that
technological
changewasanimportant
sourceof risingwageinequality.
Hot
debateensued,
withno resolution
in sight.
Thisstrandof thedebatestressed
theevolution
of labordemandby skill,
thepotential
ignoring
influence
ofsupply.Borjas
(1994)andBorjas,
Freeman,
andKatz(1992)tookadifferent
approach,
emphasizing
instead
howtradeand
immigration
augmented
thesupplyof laborin theUnitedStates.Theyfirst
estimated
theimplicitlaborsupplyembodied
in tradeflows,sinceimported
goodsincrease
theeffective
laborsupplyin theimporting
country.
Similarly,
exportsimplya decrease
in theeffectivelaborsupplyin theexporting
country.

In thisway,thehugeU.S.tradedeficitof the 1980simplieda 1.5 percent


in thelaborforce,andbecause
increase
mostof theimported
goodsusedunskilledlabor,it alsoimplied
aworkforcecharacterized
ratioof
byanincreasing
unskilled
toskilledlabor.Between
the1960sandthe1980s,anincreasing
proofimmigrants
portion
totheUnitedStates
werefromdeveloping
nations,
which
meantthata farhigherfraction
wererelatively
unskilled
justwhentherewere
moreimmigrants.
JeffreyG. Williamson

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119

Theseshiftsin thesupplyof laborproduce


thedesired
resultfor
qualitative
between
of thisstudy-wageinequality
skilltypes.Thequantitathepurposes
tiveresult,atleastin GeorgeBorjas'
(1994)hands,alsoseemsto belarge:he
declinein thewagesof highestimates
that15 to 25 percentof therelative
schoolgraduates
withthoseof collegegraduates
is attributable
compared
to
forone-third,
globalization
twoforces,ofwhichtradeaccounts
immigration,
that30 to 50 percentof thedeclinein thewagesof
thirds.He alsoestimates
relative
tothewagesofallotherworkers
high-school
isattributable
dropouts
to
thesesameforces.HattonandWilliamson
(1995;1997)showthata century
wasafarmoredominant
influence
onU.S.inequality
earlier,
immigration
than
thattradeandmigration
wastrade,andfurthermore,
influenced
relative
wages
in practically
involved
in theglobalization
everycountry
experience.
Thusfarthediscussion
hasfocusedmainlyon theUnitedStates,perhaps
andimmigration
because
havebeengreatest
risinginequality
there.Butthe
isnotsimply
forunskilled
question
laborintheUnitedStates
whythedemand
wasdepressed
inthe1980sand1990s(Freeman
andevenEurope
1995,p. 19),
butwhether
thesamefactors
werestimulating
therelative
demand
forlow-skill
laborin developing
countries.
ThisiswhereAdrian
Wood(1991,1994,ch.6;
1995b)entersthedebate.
Woodwasoneof thefirsteconomists
to systematicallyexamine
trendsacrossindustrial
inequality
anddeveloping
countries.
Wooddistinguishes
threeskilltypes:uneducated
thosewithabasic
workers,
education,
andthehighlyeducated.
ThepoorSouthhasanabundance
of uneducated
labor,butthesupplyof workers
withbasicskillsis growing
rapidly.
TherichNorth,of course,is wellendowed
withhighlyeducated
workers;
its
supplyof laborwithbasicskillsis growingslowly.Woodassumesthatcapitalis

fairlymobileandthattechnology
is freelyavailable.
Astradebarriers
falland
the Southimprovesits skillsthroughtheexpansionof basiceducation,it pro-

ducesmoregoodsthatrequire
onlybasicskills,whiletheNorthproduces
more
high-skill
goods.It followsthattheratioof theunskilled
to theskilledwage
shouldriseintheSouthandfallintheNorth.Thetendency
toward
therelative
convergence
of factorpricesraisestherelative
wageof workers
witha basic
education
in theSouthandlowersit in theNorth,producing
risinginequality
in theNorthandfallinginequality
in theSouth.
Woodconcludes
thatthedeclinein therelative
wagesof less-skilled
northernworkers
is causedbytheelimination
of tradebarriers
andtheincreasing
abundance
of southern
workers
witha basiceducation.
Healsodismisses
skillusingtechnological
as
a
change potential
explanation
forrisinginequality
becauselaborandtotalfactorproductivity
growth
bothslowedduringtheperiod.
Woodalsoargues
thatthepattern
of increasing
wageinequality
in theNorth
favors
atradeexplanation
because
thereisnocross-country
association
between
inequality
trendsandtechnological
progress.
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SincehisbookapWood'sresearch
hasmetwithstiffcriticalresistance.'
and
aboutthelinkbetween
in 1994,morehasbeenlearned
inequality
peared
thatpoorcouncountries.
Economic
theoryargues
indeveloping
globalization
unlessdemoin thefaceofglobalization,
triesshouldbecomemoreegalitarian
forcesoffsetit.Arecentreview
revolution
orindustrial
byDavis(1996)
graphic
inLatinAmerica
andEast
anda studyof sevencountries
thecontrary,
reports
didnotfallaftertradeliberalization
typically
Asiashowsthatwageinequality
hasbeenstrengthened
rose(Robbins
anomaly
1996).Thisapparent
butrather
sinceWood'sbook
by otherstudies,someof whichhavebeenrediscovered
andChoksi1991).Almosttwentyyearsago
Papageorgiu,
appeared
(Michaely,
theperiodthrough
countries
covering
Krueger
(1978)studiedtendeveloping
ofstandard
not
to
the
were
favorable
her
and
simplepredictions
1972,
findings
havebeensupported
and
by Bourguignon
tradetheory.Herconclusions
liberalization
Morrisson
(1991)andbyrecentworkontheimpactof Mexican
andHanson1995;Feliciano
onwageinequality
1996).Noneofthese
(Feenstra
tothesimultaneous
roleofemigration
fromthesecounisveryattentive
studies
thedebatefarfromresolved.
tries,however,
leaving

Globalizationand Inequalityin the Late Nineteenth


Century
realwagesfrom1854to 1913infifteencountries
Thespread
between
isshown
theorists
call
trendconfirms
whatnew-growth
in figure1.2 Thedownward
in theeconomic
thatis, a narrowing
distance
between
richand
convergence,
Theconvergence
ismoredramatic
whenAmerica
andCanadapoorcountries.
whichwerericher-orwhenPortugal
andSpain-whofailedtoplaytheglobalization
of grossdomestic
product(GDP)
Convergence
game-areexcluded.
basedon Maddison's
(1991)
elsewhere,
perworkerhourhasbeenreported
wasthecombined
data.Mostofthisconvergence
resultofthetradeboomand
theprequota
1995;O'Rourke
and
massmigrations
(HattonandWilliamson
Williamson
Taylor
andWilliamson
1997;
1994,1995,1996,andforthcoming;
Williamson
1995,1996a).
TradeIssues
Thelatenineteenth
integration
ofcommodity
century
wasaperiodofdramatic
markets:
andsteamships
costs,andEuropemoved
lowered
transport
railways
toward
freetradein thewakeof the1860Cobden-Chevalier
treaty.
ThesedeeveryEuropriceshocksthataffected
velopments
impliedlargetrade-induced
Thedropingrainpriceswasthecanonical
case:wheatprices
peanparticipant.
Jef:ey G. Williamson

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121

Figure 1. Real Wage Dispersion, 1854-1913


Coefficientof variation
3.5

O Fullsample
O SampleexcludingNorthAmerica

3 |

A Sampleexcluding NorthAmerica,
Spain, and Portugal

2.5-

2-

1.5

0.5

?J .1

1854

__

1I

1859 1864 1869 1874 1879

1884 1889 1894

1899 1904

1909 1913

Note: Wage data are urban,male, purchasing-power-parity


adjusted.
Source: Williamson(1996a,figure 1).

122

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BankResearch
vol.12,no.2 (August
Observer,
1997)
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in Liverpoolwere 60 percenthigher than those in Chicago in 1870, for example,but theywerelessthan 15 percenthigherin 1912, a declineof forty-five
percentagepoints. The commodity price differentialdeclined by even more
when the spreadis measuredfromwheat-growingregionsoutsideof Chicago.
Furthermore,pricesof all tradables,not just grain,were affected.It shouldbe
stressedthat theseglobalizationpriceshockswerefar largerthan thoseembedded in the infamous1930 Smoot-Hawleytariffor any otherU.S. tariffin the
past century.3They were also largerthan the decline in OECD tariffbarriers
inducedby the GeneralAgreementon TariffsandTradeafterthe 1940s,events
which triggeredthe globalizationboom of the lastquartercentury.WorldBank
studiesreportthattariffson manufacturesimportedby industrialcountriesfell
from 40 percentin the late 1940s to 7 percentin the late 1970s, a drop of
thirty-threepercentagepoints. Wood (1994, p. 173) uses this exampleto advertisejust how revolutionaryworld commoditymarketintegrationhas been
in recentdecades,but even this spectaculardrop is smallerthan the forty-five
percentage-pointdeclinein tradebarriersbetween 1870 and 1913 causedby
improvementsin transport.
The standardtrademodel arguesthat, as countrieseverywhereexpandthe
productionand exportof goods that use their abundant(and cheap) factors
relativelyintensively,the resultantmarketintegrationwouldleadto an internationalconvergenceof factorprices.Underthis theory,then, the latenineteenth
centurytradeboom accountedfor 10 to 20 percentof the convergencein GDP
per workerhour and in the realwage.4It also had distributionalimplications
for poor countries:it meantrisingwagesfor unskilledworkersrelativeto land
rentsand skilledwages.For rich countries,it meant that unskilledwagesfell
relativeto land rentsand skilledwages.

MigrationIssues
The correlationbetweenrealwagesor GDPperworkerhourandmigrationrates
is positiveand highlysignificant.The poorestOld World countriestendedto
havethe highestemigrationrates,whilethe richestNew Worldcountriestended
to havethe highestimmigrationrates.The correlationis not perfectsince potential emigrantsfrom poor countriesoften found the cost of the move too
high, and some New World countriesrestrictedinflowsof such migrants.But
the correlationis still very strong. Furthermore,the effect on the laborforce
was veryimportant,augmentingthe New Worldlaborf6rceby almost37 percent and reducingthe Old Worldlaborforceby 18 percent(atleastamongthe
emigrantcountriesaroundthe Europeanperiphery),much largerthan U.S.
experiencein the 1980s. One estimatesuggeststhat mass migrationsexplain
about 70 percentof the realwage convergencein the late nineteenthcentury
Jeffey G. Williamson

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123

Figure 2. Ratio of UnskilledWagesto Land Values,1870-1913


(1911

100)
New World

700

600

500

30 -

Argentina
Australia
Canada
USA

-tJ

200

ma

100

1870

1875

1880

1885

1895

1890

1900

1905

1910

1913

Old World, "Free Trade"


140o

100-

80

/-

*i

40-

20.-

1870

1875

1880

1885

1890

1895

1900

1905

1910

Britain
Denmark
Ireland
Sweden

1913

Old World, "Protected"


140

120

60

0-

40

3
-

1870

1875

1880

1885

1890

1895

1900

1905

1910

France
Germany
Spain
(1907=

100)

1913

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

124

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(Williamson1996a; Taylorand Williamsonforthcoming).This estimate,in


contrastwith the contemporarydebateaboutimmigrationin the 1980s,which
focusesonly on immigrationinto Europeand the United States,includesthe
total impacton richreceivingcountriesandpoor sendingcountries.
Becausethe migrantstendedto be unskilled,and increasinglyso towardthe
end of the century,they flooded the receivingcountries'labormarketsat the
bottomof the skillladder.Thus immigrationmusthaveloweredunskilledwages
relativeto those of skilledartisansand educatedwhite-collarworkersand relatrendsimpliedincreasedinequality
tiveto landrents.Theseimmigration-induced
in rich countries,while emigration-inducedtrends must have moved in the
oppositedirectionand reducedinequalityin poor countries.
So much for plausibleassertions.What werethe facts?

Establishingthe Facts, 1870-1913


How did the typicalunskilledworkernear the bottom of the distributiondo
relativeto the typicallandowneror capitalistnearthe top, or evenrelativeto the
skilledblue-collarworkerand educatedwhite-collaremployeenearthe middle?
The debateover inequalityin the late twentiethcenturyhas fixedon wage inequality,but a centuryearlier,landandlandedinterestswerefarmoreimportant
sourcesof income,so theyneed to be addedto the inquiry.(I believethisis true
throughoutthe developingworld,certainlyits poorerparts.5)In any case,two
kindsof evidenceareavailableto documentnineteenthcenturyinequalitytrends
so defined:the ratioof unskilledwagesto farmrentsperacre,andthe ratioof the
unskilledwage to GDP per workerhour.6Everyoneknows that farmland was
abundantand cheapin the New World,while scarceand expensivein the Old
World.And laborwasscarceand expensivein the New World,while abundant
andcheapin the Old World.Thus, the ratioof wageratesto farmrentswashigh
in the New World and low in the Old. What everyonereallywants to know,
however,is how the gap evolvedover time:Are the trendsconsistentwith the
Was there,in Wood's
predictionsof the globalizationand inequalityliterature?
century,implylanguage,relativefactorpriceconvergencein the late-nineteenth
ing risinginequalityin richcountriesand declininginequalityin poorcountries?
answers.
Figure2 suppliessome affirmative
In the New World the ratioof wage ratesto farmrentsplunged. By 1913
it had fallen in Australiato a quarterof its 1870 level;in Argentinato a fifth
of its mid-1880 level; and in the United States to less-thanhalf of its 1870
level. In the Old World the reverseoccurred,especiallywherefreetradepolicies werepursued.In GreatBritainthe ratioin 1910 had increasedby a factor
of 2.7 over its 1870 level, while the Irishratiohad increasedeven more, by a
factorof 5.5. The Swedishand Danish ratioshad both increasedby a factor
JeffreyG. Williamson

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125

Figure 3. Normalized Inequality Levels, 18 70-1913


Ratio of unskilled wages to
160.

GDP

per worker hour


...

.,J

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

140

-, *.

Belgium
Canada
Denmark

France
Germany
Italy
* ~Netherlands

1O()l
t-S_;
- -

8080

_ ,_

_, _

_,

_
________*__

60
40 4C

._________________________________________________

-,

,-

_Noray
--*-~~~~~~~~~~~~~~~

Q~1Spaint

--g- Sweden
iUnited Kingdom
* United States

1870
1890
1913
Note: Inequality levels are normalized by setting the ratio of unskilled wages to GDP per workerhour at 1870 = 100.
Source: Williamson (1996b).

of 2.3. The surgewas less pronouncedin protectionistcountries,increasing


by a factorof 1.8 in France,1.4 in Germany,and not at all in Spain.
Becauselandownerstended to be nearthe top of the income distribution
pyramid,7this evidenceconfirmsHypothesis1: inequalityrose in the rich,labor scarceNew Worldand fell in the poor, labor-abundant
Old World.There
is also some evidencethat globalizationmattered:countriesthat wereopen to
tradeabsorbedthe biggestdistributionalchanges;those that retreatedbehind
tariffwallssustainedthe smallestdistributionalchanges.
So muchforwage-rentalratios.Whataboutthe ratioof the unskilledworker's
wage (w) to the returnson all factorsper laborer,or GDPper workerhour (y).
Changesin w/ymeasurechangesin the economicdistancebetweenthe working poor near the bottom of the distributionand the averagecitizen in the
middleof the distribution.
Figure3 summarizesthe wide varianceacrossthe fourteencountriesin the
sample.PowerfulDanishandSwedishequalitytrendsestablishthe upperbound,
1913 = 244 (the indexrisesabove 100); powerfulAustralianand U.S. inequality trendsestablishthe lowerbound, 1913 = 53 (the indexfallsbelow 100).8
An alternativeway to standardizethese distributionaltrends is simply to
computethe annualpercentagechangein the indexbetween 1870 and 1913,
which rangesfrom +0.97 and +0.98 for Denmarkand Swedento -1.22 and
-1.45 for Australiaand the United States.It is plotted againstthe 1870 real
wage in figure4, and it offersa stunningconfirmationof the firsthypothesis:
Between1870 and 1913 inequalityrosedramatically
in richNew Worldcountries such as Australiaand the United States;inequalityfell dramaticallyin
126

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poor, newlyindustrializingcountriessuch as Norway,Sweden,Denmark,and


Italy;inequalityfell only modestlyin middle-income,industrialeconomiessuch
as Belgium,France,Germany,the Netherlands,and the United Kingdom.

The Impactof Globalizationon Inequality rends,


1870-1913
Theorysuggeststhatglobalizationcanaccountforthiskeystylizedfact:In an age
of unrestrictedinternationalmigration,poor countriesshouldhavethe highest
emigrationratesandrichcountriesshouldhavethe highestimmigrationrates;in
an ageof liberaltradepolicy,poorcountriesshouldexportlabor-intensive
products and rich countriesshould importlabor-intensiveproducts.Theoryis one
thing:fact is another.What evidenceon tradeand migrationin the late nineteenthcenturysupportsthis (apparently
plausible)globalizationhypothesis?
I startwith tradeeffects.Therewasa retreatfromtradeliberalismafter1880,
and the retreatincludedFrance,Germany,Italy,Portugal,and Spain. In the
absenceof globalizationforces,poorlabor-abundant
countriesthatprotectdo-

Figure 4. Initial Real Wages vs. Inequality Trends, 18 70-1913


Average annual percentage change in inequality index
1
SwedenDenmark
Falling
inequality
0.5
Norway
Italy
0

Belgium
Portugal
A -

-0.5

Netherlands
France % Germany

-1 A

Canada

UnitedKingdom

Spain

U
Australia
UnitedStates

Rising
inequality
-1.5

10

30

50

70

90

110

130

1870 real wage


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

JeffreyG. Williamson

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127

to scarce
factors
(suchasland)relative
shouldraisethereturns
mesticindustry
Inthefaceofglobalization
forces,
factors
labor).
(suchasunskilled
toabundant
of unscarcity
shouldatleastmutetherisein therelative
thesamecountries
seemsto be
Theevidence
skilledlaborandthusstemthefallin inequality.
risThatis,thecorrelation
between
withthesepredictions.
consistent
roughly
turnsoutto bebetterfor1870-90-an
andinitiallaborscarcity
inginequality
of
liberal
trade
shared
polices-thanfor 1890-1913-anenvienvironment
on theContinent.9
of risingprotection
ronment
of
Asindicated
above,theimpact
I turnnexttotheimpact
ofmassmigration.
in sendingandreceiving
countries
between
on laborsupplies
massmigration
forthreeNewWorlddestination
counfrom37percent
1870and1910ranged
thelargest
labor)to
supplyof immigrant
at44 percent
absorbing
tries(Canada
countries
losing
forsixpoorEuropean
(Italyat-39 percent
-18 percent
sending
onthereceiving
country's
impact
Migration's
share
ofitslaborsupply).
thelargest
withaninitialscarcity
oflabor,
laborforceisalsoknownto behighlycorrelated
is therefore
a
andWilliamson
notperfectly
1994).Migration
(Hatton
although
for
distribution
trends.
the
Figure5 plots
in accounting the
primecandidate
Figure 5. Inequality Trends vs. Migration's Impact on Labor Force, 18 70-1913
Averageannualpercentagechange in inequalityindex
1

Sweden'm

Denmark

Falling
inequality
0.5-

Norway

Belgium

2~~
-0.5 -

Portugal*
Netherlands
United Kingdom U

-1 -

Spain U

Canada

IGermany
France
2~~~~~~~

Australia

Rising
inequality
United States
I
-20

-1.5
-40

l
0

20

40

Migration's impact on the labor force


Source: See figure 3.

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thereceiving
whereimmigration
increased
result:
country'slaborsupply,
inequality

reduced
thesendingcountry's
laborsupply,
whereemigration
rosesharply;
inequality
declined.
it is impossible
to decomposeglobalization
effectsintotrade
Unfortunately

andmigration
because
thecorrelation
between
usingthisinformation
migration's
Yet
an
has
been
so
effort
madeby
is
impactandinitiallaborscarcity high.
a trade-globalization-impact
variableas the interaction
of initial
constructing

isstill
Theresultisthattheimpactofmigration
and"openness."
laborscarcity
ratesweresmall,
andoftherightsign:whenimmigration
powerful,
significant,
trends
whenemigration
rates
werebig,egalitarian
inegalitarian
trends
wereweak;
werestrong;
whencountries
hadto accommodate
heavyimmigration,
inegalitariantrendswerestrong.In theOldWorldperiphery,
wherelaborwasmost
hadmoreegalitarian
themoreopeneconomies
abundant,
trends,justasthe
Heckscher-Ohlin
It appears
thattheopen
trademodelwouldhavepredicted.
ofthattimeenjoyed
whilethoseamong
economy
tigers
benign
egalitarian
effects,
themoptingforautarky
didnot.IntheOldWorldindustrial
core,thiseffect
wasfarlesspowerful.
Itappears
thatopeneconomy
effectsonincomedistributionwereambiguous
in Europe
industrial
amongtheland-scarce
leaders
where
thefarmsectorwasrelatively
small.'0
Heckscher
andOhlinwouldhavepredictedthisresulttoo.Inthelaborscarce
NewWorld,however,
themoreopen
economies
alsohadmoreegalitarian
whichiscertainly
notwhat
Heckscher
trends,
andOhlinwouldhavepredicted.
Theresultis notsignificant,
however.
I readthisevidence
asstrongsupport
Overall,
fortheimpactof massmigrationon incomedistribution
andasweaksupport
fortheroleof trade.This
empirical
exercise
explains
abouttwo-thirds
of thevariance
in distributional
trendsacrossthelatenineteenth
century.
Whatforcescouldpossibly
account
fortheremaining
third,forcesthatwerealsohighlycorrelated
withinitiallabor
andGDPperworker-hour?
scarcity
Latetwentieth
century
criticsof theglobalizationthesishavearguedthatthe answerlieswithtechnological
change.
Lawrence
andSlaughter
(1993)contendthata skill-using
biasin theUnited
Stateshasdrivenrisinginequality.
Woodcounters
thatit cannotbesobecause
in theUnitedStatesandtheotherOECDcountries
inequality
wason therise
inproductivity
justwhentheslowdown
wasin fullswing.Whichever
viewthe
reader
believes,
it is important
to remember
thatwearesearching
foranexplanationthatcanaccountsimultaneously
forfallinginequality
in the South,ris-

intheNorth,andsomemixture
inginequality
amongthenewlyindustrializing
countries
in themiddle.Butis thereanyreasonto believethattechnological
changeshouldbe unskilledlabor-saving
in richcountriesand unskilled
labor-using
in poorcountries?
Thisissuehasbeenexplored
atlength(O'Rourke,
Taylor,andWilliamson
1996)usingthedataon the ratioof wagesto landrentshownin figure2.
JeffreyG. Williamson

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129

Almostbydefinition,
industrial
revolutions
embodyproductivity
growththat
favorsindustry.Becauseindustrial
outputmakeslittleuseof farmland,
indus-

instead
raisestherelative
demands
trialization
forlaborandcapital.
Industrial
to raisewagesrelative
to landrents.According
revolutions
to
tend,therefore,
thisprediction,
morerapidindustrialization
inEurope
thanin theNewWorld
ratioby morein Europe.Suchevents
shouldalsohaveraisedthe wage-rental

toaconvergence
inthepricesoffactors
ofproduction,
shouldhavecontributed
to thosein theNewWorld.
a risein realwagesin Europerelative
including
if productivity
advance
wouldbe reinforced
in thelatenineThisprediction
andland-using,
astheabovehyNewWorldwaslabor-saving
teenthcentury
andaseconomic
historians
pothesis
believe
suggests
generally
(Habakkuk
1962;
wouldbe fiurther
if
David1974;di Tella1982).Theprediction
reinforced
in theOldWorldwasland-saving
advance
andlabor-using,
productivity
as
historians
believe.
economic
generally
andWilliamson's
results
O'Rourke,
Taylor,
The
(1996,table4) arestriking.
in land-labor
of changes
combination
ratiosandcapitaldeepening
accounted
of thefallin thewage-rental
forabout26 percent
ratioin theNewWorld,but
fornoneof its risein the OldWorld.-Commodity
priceconvergence
and
effectsaccounted
Heckscher-Ohlin
forabout30percent
of thefallintheNew
Worldwage-rental
ratioandforabout23 percent
of itsrisein theOldWorld.
in productivity,
Advances
aspredicted,
werelabor-saving
in thelabor-scarce
in thelabor-abundant
NewWorldandlabor-using
OldWorld.Labor-saving
to haveaccounted
technologies
appear
forabout39 percent
of thedropin the
ratioin the NewWorld,whilelabor-intensive
wage-rental
technologies
acforabout51percent
counted
ofitsriseintheOldWorld,powerful
technologicalforcesindeed.1'
Globalization
formorethanhalfof therising
accounted
in richcountries
inequality
andfora littlemorethana quarter
of thefalling
in poorones.Technology
inequality
forabout40 percentof the
accounted
risinginequality
in richcountries
in thefortyyearsbeforeWorldWarI, and
about50 percent
of thedeclinein inequality
in poorcountries.

Establishingthe InequalityFacts, 1921-38


Whathappened
afterWorldWarI,whenquotas
wereimposed
inimmigrating
countries,
capital
markets
collapsed,
andtradebarriers
rose?
First,wagedifferentials
between
countries
widened.
Someof thedifferences
werewar-related,
andsomeweredueto theDepression,
butevenin the1920s
thetrendwasclear.Second,theconnection
between
inequality
andtheforces
ofglobalization
wasbroken
(seefigure6).Inequality
rosemoresharply
inpoorer
countries
thanin richercountries,
wherein fourcases,it actually
declined.
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Figure 6. Initial Real Wage vs. Inequality Trends, 1921-1938


Averageannualpercentagechange in inequalityindex
2 - Begu

Falling Belgium
inequality
*
0

Australia

UnitedStates

Italy
Sweden
Denmark

-2

Norway
M* *Netherlands

-3- .
Rising
inequality
-4 40

France
Germany
,

60

80

100

120

140

160

1921 real wage


Note: The real wage in 1921 relativeto an index where the UnitedKingdom= 100 in 1927.
Source: See figure 3.

Some ThingsNever Change


At leasttwo eventsdistinguishthe late nineteenthcenturyperiodof globalization fromthatof the late twentiethcentury.First,a declinein inequalityseems
to havebeen significantand pervasivein the poor, industriallatecomersin the
late nineteenthcenturysample.This move towardequalityhas not been universallytrueof the LatinAmericanandEastAsiancountriesrecentlystudiedby
other researchers.
Second,massmigrationappearsto havehad a more important effect than tradeon inequalityin the late nineteenthcentury.Exceptfor
the United States, and perhapsWest Germany,this phenomenon does not
seem to have been true of the late twentiethcentury,althoughit should be
noted that no economisthas assessedthe impactof emigrationon wagesand
inequalityin Turkey,Mexico,the Philippines,or otherdevelopingcountriesin
whichnet outmigrationhasbeensignificantoverthe pastquartercenturyor so.
Some things never change,and that fact implies a warning.Globalization
andconvergenceceasedbetween1913 and 1950. It appearsthatrisinginequality in rich countriesinducedby globalizationwas responsible,at leastin part,
JeffreyG. Williamson

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131

for the interwarretreatfromglobalization.The connectionbetweenglobalization and inequalitywas also brokenbetweenWorld War I and 1950. Rising
inequalityin the richcountriesstoppedexactlywhen immigrationwaschoked
off by quotas,globalcapitalmarketscollapsed,andthe internationalcommunity
retreatedbehindhigh tradebarriers.Are these interwarcorrelationsspurious?
The pre-WWI experiencesuggestsnot.
Is therea lessonfromthishistory?Will theworldeconomysoon retreatfrom
its commitmentto globalizationjust as it did almosta centuryago?

Notes
JeffreyG. Williamsonis the LairdBell Professorof Economicsand faculty affiliateat the
HarvardInstitutefor InternationalDevelopmentat HarvardUniversity.A longerand more
technicalversion of this paperappearedas NBER Working Paper5491 and is availableon
request(jwilliam@kuznets.fas.harvard.edu).
The researchunderlyingthis paperwassupported
by the National ScienceFoundation.I am gratefulfor the excellentresearchassistanceof Bill
Collins,Asim Khwaja,andTien Quek, aswell as for usefulcommentsfromMoe Abramovitz,
Don Davis, Ron Findlay,Tim Hatton, Doug Irwin,Ed Leamer,KevinO'Rourke,Sherman
Robinson,Alan Taylor,AdrianWood, and refereesof The WorldBankResearchObserver.
1. See,for example,Baldwinand Cain (1994), Bergstrandandothers(1994), Bhagwatiand
Dehejia (1994), Bhagwatiand Kosters(1994), Borjasand Ramey(1994), Freeman(1995),
Freemanand Katz(1994), KrugmanandVenables(1995), Leamer(1994, 1995), Richardson
(1995), Wood (1995a, 1995b), and World Bank (1995).
2. Before1870 the full sampleincludesAustralia,Belgium,Brazil,France,Germany,Great
Britain,Ireland,the Netherlands,Norway,Portugal,Spain, Sweden,and the United States.
After 1870, the sampleincludesArgentina,Canada,Denmark,and Italy.
3. The Smoot-Hawleytariffof 1930 is infamousfor its allegedcontributionto the Great
Depression.Yetthe ad valoremtariffequivalentlevelswere42.5 percentunderSmoot-Hawley,
an increaseof only 8 percentagepoints over the levelsimpliedby the 1922 TariffAct (Irwin
1995, table 1). A tariff-induced8-percentage-pointincreaseseems tiny comparedwith a
45-percentage-pointdecreasein cost as a resultof decliningtransportchargesbeforeWorld
War I-one-sixth the magnitudein fact!
4. Commoditypriceconvergenceaccountsfor aboutthree-tenthsof realwageconvergence
betweenthe United Statesand Britainduringthe twenty-fiveyearsafter1870 and aboutonetenth of the convergencebetweenthe United Statesand Swedenover the four decadesafter
1870; however,Anglo-American
commoditypriceconvergenceeffectswereswampedby other
forces after 1895, and they made only a modest contributionto Anglo-Swedishreal wage
convergenceover the four decades as a whole (O'Rourke and Williamson 1994, 1995).
O'Rourke,Taylor,andWilliamson(1996) turnedto econometricanalysisof wage-rentaltrends
in sevencountries(includingBritainand Sweden)to searchfor the averagecase.They found
that commoditypriceconvergencecould explainabout a quarterof wage-rentalconvergence
betweenthe New World and the Old World. These estimatesareclose to the 10-15 percent
reportedby Richardson(1995, p. 36) for the contributionof tradeto rising United States
inequalityfrom the 1970s.
5. As faras I am aware,recentstudiesof the globalization-inequality
connectionin developing countriesfocus almostexclusivelyon wage inequality,and sometimesonly on urbanwage
inequality.I think this is a big mistakefor countrieswhereruralwage employmentis signifi-

132

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cant and wherelandedinterestsarepowerful.Surelythe economicposition of landlordsand


rurallabormattersin economieswhereagricultureis one-fifth,one-quarter,or evenone-third
of the economy.
6. O'Rourke,Taylor, and Williamson (1996) constructeda panel databasedocumenting
the convergenceof the ratioof unskilledwagesto farmrentsper acreamong late nineteenth
centurycountries(figure2): four New World countries-Argentina, Australia,Canada,and
the United States;four free-tradeOld World countries-Denmark, Great Britain,Ireland,
and Sweden;and threeprotectionistOld World countries-France, Germany,and Spain.
7. This was certainlytrueof Europe,Argentina,and the AmericanSouth, but less truefor
the AmericanMidwestand Canada,wherethe familyfarmdominated.
8. The equalityindex is normalizedby setting wly 1870 = 100.
9. In addition,the slope on an estimatedinequality-real-wageregressionline is farsteeper
in 1890-1913 without the protectedfive (France,Germany,Italy,Portugal,and Spain)than
with them. We sawthe samecontrastwhen comparingwage-rentalratiotrendsbetweenfour
Old World countrieswith free trade and three Old World countriesthat are protectionist
(figure2).
10. This was nottrue in Englandduringthe 1830s when the Corn Lawscan be shown to
have had inegalitarianimplicationsand thus that repealhad egalitarianimplications(Irwin
1988; Williamson1990; O'Rourke1994). Englandhad a very differenteconomic structure
and mix of political interestgroups in the 1830s comparedwith the 1880s, a half century
later.
11. The residualwas 5.1 percentfor the New World and 27.5 percentfor the Old.

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