Movement of Money, Capital, and People

Lecture 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 Age
Economic theory says poor countries should
have caught up (converged) with the rich
– Evidence of convergence in the Golden Era?
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 Figure 1: Immigration 1870-1913
European Periphery
Denmark -14 •Labor flowed from where it
Norway -24 was abundant (cheap) to where
Sweden -20
it was scare (and expensive).
Italy -39 That is, from the Europe
Portugal -5
Spain -6
periphery to Areas of Recent
Ireland -45 Settlement (ARS).
European Indus trial Core •This raised wages in the
France -1
Germany -4
Europe periphery and led to
Great Britain -11 falling wages in ARS.
Netherlands -3
•Thus, inequality fell in the “old
Areas of Recent Settlement
Argentina 86 world” and increased in the
Aus tralia 42 “new world”
Canada 44
US 24

Migration as % of the 1910 labor force

Ireland lost 45% of its labor force to emigration;
Argentina gained 86% of it’s labor force to
immigration 2
Figure 2: US Immigration
(% resident population)

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 Figure 3: Int’l Capital Flows: 1880-1913
From France and Germany
From England

20% 10%

United States Russia

Britain Europe
Germ.
47% France
20%

COMMONWEALTH
(esp. Canada, Australia) Balkans
Latin America

Capital flowed from where it was abundant to where it was scare. English
investors focused on Areas of Recent Settlement while French and
German investors went to developing regions on the continent.

4
Figure 4: European Trade Policy
•Tariffs were not
uniformly low in
Europe, and they rose
after 1870 (except in
England).
•The United States (not
in figure) had high
tariffs throughout the
period.

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 Figure 5: Commodity Prices Converge
ANGLO-AMERICAN COMMODITY PRICE CONVERGENCE

Price Gap by Year, %

Commodity Markets 1870 1895 1913
Wheat Liverpool/Chicago 0.576 0.178 0.156
Meat London/Cincinnati 0.925 0.923 0.179
Textiles Boston/Manchester 0.137 0.037 -0.036
Iron Philadelphia/London 0.75 0.434 0.206
Cotton Liverpool/New York 0.133 0.112 0.097
Copper Philadelphia/London 0.327 0.136 -0.001
Wool Boston/London 0.591 0.659 0.279
Tin New York/London 0.159 0.053 -0.023
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 technologies of transportation. 6
Economic Growth and “Convergence:” Introduction
to Growth Theory
To understand why inequality across nations is increasing,
we need to introduce a little growth economics
Put most simply, the key to poverty reduction and
economic growth is higher productivity
Productivity = output (Y) per hour of work (L) = Y/L
It’s sometimes called labor productivity
It’s “the explanation” for why some countries are rich and
others are poor. Countries that are behind on productivity
are behind in income per capita
Productivity growth is how to achieve higher income per
capita

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 Growth 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 up
with 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)
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Figure 6: Catching-up is known as the “Convergence
Hypotheses” represented graphically below

9
Figure 7: When all countries are considered, there’s
not much evidence of convergence recently

10
 Figure 8: But countries that integrated with the
global economy saw large productivity gains and
grew fast

Note: 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.” 2001
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 Reasons 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 technologies
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 Figure 9: Convergence Club, 1870-1913

Member 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 Japan.
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