Movement of Money, Capital, and PeopleFigure 1: Immigration 1870-1913Figure 2: US Immigration (% resident population)Figure 4: European Trade PolicyFigure 5: Commodity Prices ConvergeGrowth Theory (cont.)Reasons for lack of catching upFigure 9: Convergence Club, 1870-19131Movement of Money, Capital, and PeopleLecture Outline• Goods, Capital, and Labor flowed across national frontiers in unprecedented quantities– As with trade, endowments and the HO theorem help us understand the pattern of these factor flows (Figures 1-5)– And SS theorem helps us understand the domestic distributional effects of factor flows and the structure of interests• Distinct pro-globalization and anti-globalization groups• “Convergence” during the Golden AgeEconomic theory says poor countries should have caught up (converged) with the rich – Evidence of convergence in the Golden Era?2Figure 1: Immigration 1870-1913Eur opean Periphe ryDenmark -14Norway -24Sweden -20Italy -39Portugal -5Spain -6Ireland -45European Industrial CoreFrance -1Ge rma n y -4Great Britain -11Netherlands -3Areas of Recent SettlementArgentina 86Australia 42Canada 44US 24•Labor flowed from where it was abundant (cheap) to where it was scare (and expensive). That is, from the Europe periphery to Areas of Recent Settlement (ARS).•This raised wages in the Europe periphery and led to falling wages in ARS.•Thus, inequality fell in the “old world” and increased in the “new world”Migration as % of the 1910 labor forceIreland lost 45% of its labor force to emigration; Argentina gained 86% of it’s labor force to immigration3Figure 2: US Immigration (% resident population)4Figure 3: Int’l Capital Flows: 1880-1913From EnglandBritainUnited StatesEuropeLatin AmericaCOMMONWEALTH(esp. Canada, Australia)20%20%10%47%From France and GermanyRussiaBalkansFranceGerm.Capital flowed from where it was abundant to where it was scare. English investors focused on Areas of Recent Settlement while French andGerman investors went to developing regions on the continent.5Figure 4: European Trade Policy •Tariffs were notuniformly low in Europe, and they rose after 1870 (except in England). •The United States (not in figure) had high tariffs throughout the period.6Figure 5: Commodity Prices ConvergeCommodity Markets 1870 1895 1913Wheat Liverpool/Chicago 0.576 0.178 0.156Meat London/Cincinnati 0.925 0.923 0.179Textiles Bos ton/Manchester 0.137 0.037 -0.036Iron Philadelphia/London 0.75 0.434 0.206Cotton Liverpool/New York 0.133 0.112 0.097Copper Philadelphia/London 0.327 0.136 -0.001Wool Boston/London 0.591 0.659 0.279Tin New York/London 0.159 0.053 -0.023ANGLO-AMERICAN COMMODITY PRICE CONVERGENCEPri c e Gap by Ye ar , %In 1870, the price of wheat in Liverpool was 58% higher than in Chicago; by 1913, the price difference had fallen to about 16%. For copper, the differential all bit disappeared (as in the Law of One Price).Despite relatively high tariffs, globalization proceeded, due to great improvements in the technologiesof transportation.7To understand why inequality across nations is increasing, we need to introduce a little growth economicsPut most simply, the key to poverty reduction and economic growth is higher productivityProductivity = output (Y) per hour of work (L) = Y/LIt’s sometimes called laborproductivityIt’s “the explanation” for why some countries are rich and others are poor. Countries that are behind on productivity are behind in income per capitaProductivity growthis how to achieve higher income per capitaEconomic Growth and “Convergence:” Introduction to Growth Theory8Growth Theory (cont.)• So what explains productivity growth?– Higher productivity (Y/L) requires better technology or more capital (tools for workers). New and better ways of producing goods raises productivity• If there are no impediments to the flow and use of technology and capital, then countries or regions that are behind in productivity should have higher productivity growth: they should be catching upwith rich countries!– This is because technology should spread rapidly to poor nations through international trade and foreign direct investment, the internet, etc– And capital should flow to where returns are higher (in poorer countries where capital is scare)9Figure 6: Catching-up is known as the “Convergence Hypotheses” represented graphically below10Figure 7: When all countries are considered, there’s not much evidence of convergence recently11Figure 8: But countries that integrated with the global economy saw large productivity gains and grew fastNote: Countries in the “More Globalized” group include China, Mexico, Argentina, Philippines, Malaysia, Thailand, India, Bangladesh and Brazil.Source: David Dollar and Art Kraay, “Trade, Growth, and Poverty.” 200112Reasons for lack of catching up• Government restrictions on economic transactions– Trade barriers, capital controls, state monopolies, and excessive regulation reduce incentives for innovations and investments needed to boost productivity– Generally, countries that integrate with the world economy experience convergence (Figure 8)• Poor institutions – Weak property rights, absence of the rule of law, and corruption creates disincentives to invest • Poor education. – Low educational attainment reduces human capital and impedes the adoption of new technologies13Figure 9: Convergence Club, 1870-1913Member list: The following regions experienced rapid convergence in the Golden Age: Areas of recent settlement (Canada, the U.S., Australia, New Zealand, Argentina, Chile, Uruguay, and perhaps South Africa ), most of Europe (Belgium, the Netherlands, France, Germany, Switzerland, Spain, Italy, Austria-Hungary, Denmark, Norway, Sweden, Finland, and Ireland), plus