Jeffrey Williamson in his ASSA paper analyzes the process of convergence during the first globalization period and it’s subsequent reversal in the interwar period. His dependent variable are the real wage rates across countries where data is available (mostly Western Europe, the United States, Canada, Argentina, and Australia), as well as the derived income inequality. Williamson prefers wage rates to GDP measures for several reasons: data quality, distributional focus and factor price movements being among those he mentions.
During the period of 1870-1914, one can observe a significant convergence in incomes across the Atlantic economy, after a time of little globalization, divergence shocks and convergence periods in the earlier parts of the 19th century. Wage divergence dropped by a third until 1900. The greatest explanatory power have the European countries catching up with the new world, the Nordic countries being the prime example of this process. The ‘Scandinavian miracle’ is explained in the text greatly by mass emigration as well as capital inflows. The conclusions are supported by GDP estimates too, although factor prices show a more significant convergence - just as the Heckscher-Ohlin model accounting for income distributional effects would predict. Mediterranean countries seemed to have missed the globalization boom: performed badly, having small emigration rates and high trade restrictions.
Further in the paper, Williamson focuses on the globalization’s effects on income distribution. Author’s observations go in line with the Heckscher and Ohlin model again, stating that the wage/rental ratio decreased significantly in the land-abundant and labor-scarce new world and at the same time increased in Europe. This means also that income inequality rose in the new world thanks to immigration pushing down particularly the low-skilled workers’ wages, as well as dropped in Europe where immigrants were leaving from. Another inequality measure based on Maddison (1995) confirms these conclusions: inequality rose in rich countries such as Australia, Canada and the Unites States, and fell in poor newly industrializing countries such as Norway, Sweden or Italy.
The following backlash to the first wave of globalization consisted mainly of restrictions on immigration and tariffs. The restrictions on immigration into the new world increased in significance gradually throughout the end of the 19th and the beginning of the 20th century, mostly as a result of worsened labor market conditions rather than absolute number of immigrants (p. 15). This confirms the role of inequality dynamic in immigration policy: declining relative unskilled labor scarcity encouraged more restrictive measures.
The tariff acts came first in Europe as a response to the agricultural interests’ suffering due to Atlantic competition. Policies reacting to the ‘grain invasion’ varied according to the price shock’s effect on the different European economies (countries with stronger farming sector being hit more than those with a weaker one). Protectionism in the United States came from the demands of the manufacturing circles in the North, which developed under artificial conditions of earlier wartime autarky. Tariff levels soared after North’s victory in the Civil War; redistributing wealth from Southern landowners to Northern capitalists and wage-earners. Similar developments towards protectionism are observable in other countries of the new world such as Canada, Brazil, and Australia.
How did the de-globalization trend effect within- and between- country inequalities? Between countries, the convergence trend stopped. Within countries, inequality rose in labor-abundant countries, and fell in land-abundant countries, reversing the trend from the globalization period before.
In sum, Williamson’s insights confirm the predictions of the Heckscher-Ohlin model of distributional effects between labor-abundant and land-abundant regions. While factor prices were converging in the Atlantic economy before 1914, inequality fell where unskilled wages rose relative to farm rents, and rose where unskilled wages fell relative to farm rents. Factor price convergence and income distributional effects thus help explaining the switches in world-wide economic-political orientations that followed after the First and Second World Wars, which have been so far treated only as exogenous to the system.
