Theory Needs History
Two important features of today's international economy characterized the late 19th century as well. First, the earlier period was one of rapid globalization: capital and labor flowed across national frontiers in unprecedented quantities, and commodity trade boomed as transport costs declined sharply. Second, the late 19th century underwent an impressive convergence in living standards, at least within most of what we would now call the OECD club. Poor countries at the periphery of the European club tended to grow faster than the rich industrial leaders at the center of the Old World, and often even faster than the richer countries overseas in the New World. Third, inequality was on the rise in the U.S. and the rest of the rich New World while it was falling in the poorest parts of the Europe. To what extent were globalization, convergence and inequality connected?
I will argue that most of the convergence between 1850 and 1914 was due to the open economy forces of trade and mass migration. I will by inference also suggest that convergence stopped between 1914 and 1950 because of de-globalization and implosion into autarchy. In addition, I will argue that a good share of the rising inequality in North America was due to globalization.
I start with the convergence evidence and then offer the open economy explanations for it. Then I turn to inequality.
Convergence in the Past
What does history have to say about convergence? To answer that question, we first have to agree on the meaning of convergence. The critical bottom line for me is whether the living standard gap between rich and poor countries falls over time. Convergence implies an erosion in this gap, at least in percentage terms. Second, what history? My interest has always been in what Simon Kuznets called modern economic growth, and that translates here into the century and a half since about 1850. Third, convergence of what? GDP per worker-hour estimates offer one set of data. Real wages of the urban unskilled offer another. Fourth, convergence among whom? My net will only capture members of the present OECD club with European origin (plus Argentina and Brazil). Why the small net? Because I think the sources of convergence in the OECD club are themselves misunderstood, and it matters to get the facts right.
Figure 1 documents real wage convergence from mid-century to the Great War. It was pronounced, even when compared with the more familiar experience of past four decades. Gross domestic product per worker-hour also converged. However, real wage convergence was a lot faster than GDP per worker-hour or GDP per capita, and the globalization arguments which follow offer some reasons why.
While impressive, the late 19th century convergence implies that real wage gaps would still have persisted well into the present century even had the convergence not been interrupted: big initial gaps take a long time to erase, even when convergence is persistent. But it didn't persist: an anti-convergence regime intervened which stopped convergence between 1914 and 1950.
There are instructive country performances hidden by these summary statistics, especially the big North American outliers, Canada and the United States, both of whom buck the convergence tide. North America enjoyed a spectacular leap into industrial superiority after the early 1890s. The great leap forward is manifested by rich North America improving its advantage over the poorer industrial Old World after 1890: real wages in the United States were 72 percent higher than in Britain in 1870; that wage advantage had diminished to 63 percent by 1890, supporting convergence; but by 1913 the United States regained everything it had lost. Canada offers an even better example of North American resistance to convergence. Canada improved its real wage superiority from 48 percent above Britain in 1870 to 57 percent in 1900 and, riding the prairie wheat boom, to 123 percent in 1913. …