Date Published:
Feb 1, 2008
Abstract:
W. Arthur Lewis argued that a new international economic order emerged between 1870
and 1913, and that global terms of trade forces produced rising primary product
specialization and de-industrialization in the poor periphery. More recently, modern
economists argue that volatility reduces growth in the poor periphery. This paper assess
these de-industrialization and volatility forces between 1782 and 1913 during the Great
Divergence. First, it argues that the new economic order had been firmly established by
1870, and that the transition took place in the century before, not after. Second, based on
econometric evidence from 1870-1939, we know that while a terms of trade improvement
raised long run growth in the rich core, it did not do so in the poor periphery. Given that
the secular terms of trade boom in the poor periphery was
much bigger over the century
before 1870 than after, it seems plausible to infer that it might help explain the great 19th
century divergence between core and periphery. Third, the boom and its deindustrialization
impact was only part of the story; growth-reducing terms of trade
volatility was the other. Between 1820 and 1870, terms of trade volatility was much
greater in the poor periphery than the core. It was still very big after 1870, certainly far
bigger than in the core. Based on econometric evidence from 1870-2000, we know that
terms of trade volatility lowers long run growth in the poor periphery, and that the
negative impact is big. Given that terms of trade volatility in the poor periphery was even
bigger during the century before 1870, it seems plausible to infer that it also helps explain
the great 19th century divergence between core and periphery.
Notes:
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