Globalization Backlash? Income Distribution Effects of Trade and Migration since the 19th Century
Bachelor Thesis 2011 38 Pages
Table of Contents
Globalization in the 19th Century: Trade, Migration and Backlash
Trade Theory: Heckscher-Ohlin Model
Migration Theory: Labor Supply and Demand of Migration
Globalization in the 20th Century: A Future Backlash?
The study examines possibility of future globalization backlash as a result of trade and migration income distribution effects. By looking back into the history of past globalization in the late 19th century, more specially, during 1880-1914, the study defines the cases of backlash. Coming back to the present, bearing in mind past experiences, current contexts of trade and migration in the current era of globalization are evaluated, in particular, the last 30 years. The study shows that, with a healthy dose of restriction and safety net from the government, income distribution effect can be controlled and therefore, a future of globalization is not a likely outcome.
Globalization is not a new phenomenon. To many, it is the fact of life. Globalization, without doubt, touches all facets of the world we live in. It is often hailed as the source of prosperity, advancement and integration, but at the same time, also the root of many of the world’s problems.
Globalization is an abstract concept. Its ubiquity and abstractness make any attempt to define the concept either insufficient or unsatisfactory. However, in this study, globalization is examined from an economic point of view. Therefore, globalization can be defined as “the increasingly close international integration of markets for goods, services and factors of production, labor and capital” (Bordo 2002).
Against conventional belief, globalization is not as self-evident as it is often viewed, or more precisely, expected. History has it that since the 19th century, there has been at least two times globalization fell into stagnancy as a result of restriction of trade and migration (Williamson 1998). Not surprisingly, among modern economists, there has been voice questioning its existence.
Interested in the sustainability of globalization, this study presents an effort to travel through historical discourses since the long 19th century to examine whether or not globalization, as pervasive and rigorous as it can be, might “sow the seeds of its own destruction” (O’Rourke & Williamson 1999). The focus is on income distribution since this is the most straightforward and influential consequence of globalization at least in terms of economics.
Here, it is essential to note that, globalization is driven by three major forces—commodity, labor and capital market (Bordo, Taylor and Williamson 2003). These three forces have always been intertwined and complementing with one another. Through different periods, each can be assigned unequal weights; however, their impacts are, under no circumstance, to be dismissed. The scope of this study, however, is devoted to the first two markets, commodity and labor markets. This selection does not reflect a differentiated designation of importance to any of those three markets, but rather an intentional choice to best illustrate the income distribution effects which are central to this study. Moreover, there has been a long tradition of research with interesting results in these two markets since the 19th century. The study sets the timeframe at two specific episodes, from 1880 to 1914 and from 1980 to date. 1880-1914 is the period when the global economy, at the height of its convergence, started to show its disintegration. In light of past experience, the study examines the last 30 years and assesses the possibility of a future wave of globalization backlash. Throughout the study, the primary research subjects are the Atlantic economies who are at the present, members of the Organization for Economic Co-operation and Development (OECD) including Western Europe, Southern Europe, North America and Australasia. It is not to disregard the role of the rest of the world, including the two major economies nowadays, China and India. But it is to remind that the initiators, leaders and determinants of the process have long been the Atlantic economies. This reality particularly held true for the past, and remains fundamentally significant at the moment. Their decision, therefore, have a decisive magnitude in the pace and spread of globalization. Other economies, especially those in Asian and Africa, will be mentioned more frequently in the analysis of the modern time—the last 30 years, when their impacts on global economy have achieved unprecedentedly growing importance.
According to O’Rourke and Williamson (1999), trade and migration indeed led to globalization backlash in the past. In greater details, trade and migration distorted the economic structure of trading and sending or receiving countries, redistributing wealth between different groups in both national and international scales. The distribution effects were different in the 19th and 20th century. However, in both times, there emerged winners and losers. The dissatisfaction stemming from these distribution effects, especially from the viewpoint of the losers led to tariffs and migration restriction movements all over the world, in particular, in the Old and New World. Globalization backlash came as an inevitable consequence. That is the story of the past. How about the presence? Trade and migration are still going on as a matter of life, though legal barriers have been raised and contested everywhere. Will the resulting income distribution effects once again slow down globalization and drag the world economy into an era of stagnancy? What can we do to deal with such a scenario? Note that trade and migration have always been hot topics and a great share of current policies in the fields has either proved insufficiently effective or ignited endless debates.
However, this study will align with the optimists. While acknowledging the possibility of another backlash due to modern trade and migration, the study will point out that with proper policy implementation from the governments, as well as international organizations, especially those of the leading economies, the negative consequences of globalization will be mitigated.
In the first section, the study will examine past backlash by looking into income distribution effects of the two forces in the late 19th century, in particular, the episode of 1880-1914. The analysis is backed up by trade and migration theories that explain the mechanism by which wealth was redistributed within countries. The second section is devoted to defining trade and migration patterns in the modern time—the last 30 years. As different patterns of trade and immigration now and then will be revealed, so will backlash in the past, the study will move forward and discuss the likelihood of future backlash, at the same time, valuate current efforts from the side of nations as well as the international community to counteract such untoward outcomes.
Globalization in the 19th Century: Trade, Migration and Backlash
Despite the quietness of the early 19th century, the mid-19th century saw a breakthrough of world economy into a new era of increasingly integrated global markets. Globalization soon became the buzz word. Its imprint spread all over the world with unprecedented trade and mass migration flowing through every continent, opening up possibilities for countries to catch up with their superiors, for labor to seek a better life in faraway destinations. Here and there were stories of convergence, advancement and prosperity. The other side of the story, however, is now as much auspicious. Globalization caused income distribution, which in turn, created and widened the gap between winners and losers within economy. Voices of discontent were translated into trade and migration restrictions that set foundation for backlash in the decades following World War I.
For a better understanding of past backlash, this section will look into trade and migration during 1880-1914—the heyday of globalization in the 19th century, at the same time, the height of divergence between winners and losers within country. Subjects of analysis are the Atlantic economies. Theoretical background of international trade and migration is of essential importance in explaining the cause and consequence of income distribution effects behind this process.
Trade Theory: Heckscher-Ohlin Model
The fundamental theoretical model accounting for trade in this study is the classic Heckscher-Ohlin model of international trade which predicts production and trade patterns based on factor endowments. According to Heckscher and Ohlin, countries can increase welfare by exporting products that use their abundant and therefore cheap factors of production, and importing products that use the countries' scarce factors (Van den Berg 2004). Here, comparative advantage is the key word. Comparative advantage refers to activity for which an economy’s opportunity cost is the lowest and therefore, the activity it should specialize in. The principle of comparative advantage states that as long as trading countries have different opportunity costs for producing the same goods, they can benefit from international trade (Ricardo 1911).
A simple two-country general equilibrium model can well illustrate the theory. Supposed that there are only two countries in the world market—Homeland and Abroad, producing only two goods, food and clothes. Two countries have the same consumer taste but different productive capacities, therefore, possess identical indifferent curves but different production possibilities frontiers. Homeland has some advantage in producing food while Abroad has some advantage in producing clothes. The price ratios, p and p* in Homeland and Abroad, as a result, are different in two countries in case of self-sufficiency. In the first scenario, there is no trade. Homeland and Abroad produce and consume at A and A* respectively. In the second scenario, the two countries open their borders and start trading with each other (Figure 1). Due to the price difference of food and clothes between two countries, Homeland sees the opportunity to export its relatively cheap food and import Abroad’s relatively cheap clothes. The opposite holds true for Abroad. Trade causes each country’s relative prices to move in the direction of the other’s relative price ratio. Under very strict assumptions of no trade barriers or transport costs, trade grows until the price ratios become equal in two countries. Now, production in Homeland and Abroad shifts to P and P* respectively, while consumption shifts to C and C* respectively. Thanks to trade, both countries are able to raise their welfare. All in all, the two country general equilibrium model shows that countries can reach higher levels of welfare by specializing in and exporting the goods they have lower opportunities costs (Van den Berg 2004).
In international trade, as countries everywhere specialize in producing commodities which use their abundant and cheap factors, they are able to reap the benefits from trade. Alongside, there is a convergence of international factor prices. As a result, the world’s overall welfare increases. The national level, however, is a different story. According to Stolper-Samuelson theorem, a basic theorem in Heckscher-Ohlin model, a rise in the relative price of certain factors will lead to a rise in the returns to those factors, and reversely, a fall in the returns to the others. Clearly, within each trading country, there is a divergence of returns to factors of production (Stolper and Samuelson 1941). This income distribution creates winners and losers across economies even in the face of increasing global welfare.
Migration Theory: Labor Supply and Demand of Migration
To understand the distribution effects of international migration, the study will elaborate on the labor supply and demand models of migration in sending and receiving countries.
To begin with, the study considers a simple model of the labor market.The labor supply curve or the value of marginal product of labor (VMPL) is defined as the marginal physical product of labor (MPL) multiplied by the marginal price of the output (P): VMPL = MPL x P. It is downward-slopping as aligned with the law of diminishing return, that is, the marginal product of labor diminishes as the number of labor increases. The labor supply S is a vertical curve at quantity q, representing the number of labor in the given economy. At wage w, the demand curve intersects with the labor supply. The area under the labor demand curve is the sum of all marginal values, representing the total value of output produced. The income from such outputs is divided between labor (rectangle forming by the demand curve and the horizontal line through w) and other factors of production in the economy such as land or capital (triangle formed by the supply curve and the horizontal line through w) (Van den Berg 2004).
In case of international migration, supposed there are only two countries, France and Morocco in the world economy. France has less labor but higher wage while Morocco has more labor but lower wage. The high wage in France attracts labor from Morocco, leading to migration from Morocco to France. Under the assumption of neither restriction nor migration costs, the movement of labor from Morocco to France will alter the labor demand and supply in both countries (Figure 2). The supply curve in Morocco moves to the left, while the supply curve of France move to the right, implying an decrease of labor in Morocco and an increase in France. The resulting income distribution effects in two countries are summarized in Table 1. Although the output in Morocco declines, the world output rises as Morocco’s output is outweighed by increasing output in France. Within country, remaining workers’ welfare in Morocco, migrants’ wage and real income, as well as owners of other factors and real income in France are augmented while owners of other factors and real income in Morocco and workers in France experience a loss. At the same time, proper attention should be paid to the effects of migration on the demand side in both sending and receiving country. As the quantity of labor changes in both countries, the labor demand curve moves downward in sending country and upward in receiving country, lessening the net effects on wage in sending country and pushing up the effects on wage in receiving country (Figure 3 and 4). In case of remittances, quite differently, the labor demand in sending country can increase even in the context of less labor. As demand increases, the wage in sending country can slightly rise. The contrary goes to receiving country. However, all these changes are insignificant compared to the effects in the supply side. Conclusions from the France-Morocco example remain valid. All in all, as the model points out, international migration increases global welfare, however, at the expense of certain groups within each country (Van den Berg 2004).
International trade and immigration theories come to the same conclusion that, trade and migration increase global welfare, however, at the cost of income distribution on the national level. Winners and losers emerge as an inevitable consequence. The losers, once actively campaigning for their interests, are well capable of mobilizing support from the government in forms of trade and migration restrictions. These restrictions pose an obstacle for the integration of international markets for commodities and labor underlying globalization. The reality of the 19th century provides a vivid example.
International trade is a representative feature of international economics in the late 19th century thanks to the dramatic decline in transport costs. Commodity markets linked different parts and regions in the world, pushing forward the process of globalization. In this period, the primary trade route is between the Old and New World. During 1880-1914, the episode that this study analyzes, the East-West maintained its importance. Other routes, for example, intra-European or intra-Asia, did exist; however, their magnitude and influence in terms of commodity market integration were far less significant in comparison to the East-West route (Findlay and O’Rourke 2003).Therefore, searching for past globalization backlash in terms of income distribution effects, the study focuses on the Atlantic economies and the trade flows between the Old and New World.
It is crucial to bear in mind the difference in factor endowments between the Old and New World. The Old World at that time was on the rise in industrialization and strong in manufacturing. Its abundant factor was capital while its scarce factor was land. The New World, on the contrary, was land-abundant but capital-scared. The trade patterns followed that the Old World exported manufacturing goods and imported agricultural goods while the New World moved in the opposite direction as suggested by Table 2. Consequently, manufacturing prices fell in the New World while agricultural prices fell in Europe. There was a factor price convergence across the two regions (Williamson 1998).
However, within country, the trade boom redistributed income across sectors. A straightforward manifestation of this income distribute-on effect can be seen in the wage-rental ratio. As Table 3, Figure 5, Figure 6 and Figure 7 suggest, the wage-rental ratios were in decline everywhere in the New World, and on the rise in most of the Old World (except for Spain ). A closer look into selected countries in the Old World (Figure 6 and 7) reveals the impact of policies on the ratios. Free-trade Old World such as Great Britain, Denmark, Sweden or Ireland were better able to reap the gains from trade, resulting in more dramatic increase in the wage-rental ratios compared to protected Old World such as France or Germany (O’Rourke and Williamson 1999). In general conditions were improved for the poor and unskilled workers relative to the rich landlord in much of Europe. This conclusion was more relevant for countries with freer and opener trade policies. The opposite held for the New World (Williamson 1998).
Trade in this episode is well aligned with the Heckscher-Ohlin model: (1) countries focused on producing and exporting goods they are relatively better at producing and (2) the overall world welfare increased. However, as predicted by the Stolper-Samuelson theorem, in the national level, there were winners—capitalists in the Old World and landowners in the New World, and losers—landowners in the Old World and capitalists in the New World. The discontent from the side of the losers and its ability to mobilize political support were the key to understand globalization backlash in the decades following World War I.
 See Table 2 (Kenwood and Lougheed 1999).
 During this timeframe, Spain still belonged to the poor periphery not only in Europe but also in the world, under less impact of international trade, and in a broader sense, globalization (Williamson 2008).
 The Heckscher-Ohlin model can only hold true if it was commodity market integration was the powerful factor that drove the wage-rental ratios. By running regression on the relative prices, land-labor and capital-labor ratios in seven Old and New World during 1975-1914, Table 4 shows that land-labor and capital-labor positively affected wage-rental ratios. Although individual country cases showed varying degree of impact ranging from zero to almost 50%, when combining seven countries, roughly 25% of wage-rental ratio convergence came from trade (O’Rourke and Williamson 1999).