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World Economic History

by: Madie Schinner

World Economic History ECN 110B

Madie Schinner
GPA 3.57


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This 23 page Class Notes was uploaded by Madie Schinner on Tuesday September 8, 2015. The Class Notes belongs to ECN 110B at University of California - Davis taught by Staff in Fall. Since its upload, it has received 30 views. For similar materials see /class/191880/ecn-110b-university-of-california-davis in Economcs at University of California - Davis.


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Date Created: 09/08/15
Notes taken by Charles Stoecker in Econ 110B Professor Chris Meissner I took these notes for fun I take no responsibility for their completeness Lecture 8 April 29 2008 Cameron and Neal Ch 14 p339348 Pax Britannica before World War I Keynes 7 1930s macroeconomist upset with peace plan after WWI saw that it doomed Germany to lots of economic difficulties and predicted vengance Suggested essay question compare and contrast Marshall plan with peace after WWI Changes after WWI Gold standard suspended so they could print money to finance the war Gold standard restored in middle of 1920s Gold standard was feasible before since politicians didn t listen to workers who were hurt by gold standard but after WWI more democratic so workers more powerful so government commitment to gold standard not credible Also no cooperation New nations Austria Hungary Bulgaria Poland etc dependent on tariffs for finances trade under government control these countries focus on industrializing despite what theory of comparative advantage recommends USA raises tariffs even further in the 1920s Even Britain does away with most favored nation clause low tariffs guaranteed whenever a new low rate is negotiated Naval blockades of Germany shuts down networks of trade production lines change raw materials sourced from Latin America and southeast Asia problem after the war ends as Europe recovers it eliminates market for goods from Brazil and elsewhere Brazilians raise tariffs further aggravates free trade system New York replaces London as financial capital Americans cannot stabilize expectations like the Bank of England could during previous crisis Reparations war debts tangle 7 Europeans have debts among themselves and to US want Germany to pay reparations and war indemnity this is very fragile since it depends on US to keep credit open and Germany to keep paying the debts Gold Standard Led to integration provided fixed exchange rates stability of international trade low transaction costs But in 1920s people started realizing the connection between the money supply and employment levels When the money supply goes down interest rates go up this makes investments more costly this pushes down output and consumption and employment up Volatility of exchange rates makes it difficult to plan international commerce so countries want to go back on gold standard but at Genoa conference countries decide there is a gold shortage so they make a gold exchange standard Basically some countries back their currency with gold other countries back their currency with currency from other countries that are backed with gold But US doesn t want to come to the conference In April 1925 UK goes back onto gold standard at the old parity Many people thought the pound was overvalued This makes the UK run persistent trade de cits UK goods overvalued foreign goods undervalued in UK and racks up debts year after year consuming more than it can produce To balance this out you could default not pay your debts devalue change the exchange rate 7 not possible with gold standard seen as weak or de ate lower prices 7 but that takes down wage lowers employment makes debts more expensive War Debts Allies decide Germany owes 33 bil That s a full year of Germany s output US refuses to forgive war debt from allies so allies refuse to forgive Germany Circular system depends on US lending money to Germany so Germany can repay allies and allies can repay US High returns on capital in Europe made this attractive at first High tariffs diminish gains from natural complementarities diminishing overall income and make war debts hard to repay Hyperin ation Hyperin ation 7 price rises of more than 50 per month ie 1300 per year Graph of dollar mark exchange rate prices and note circulation 7 massive rise in German in ation around 1922 Two explanations Budget deficits caused hyperin ation structural view Budget deficit caused by need to repay war reparations When you re running a budget deficit you can issue debt German central bank issues money to cover govemment s debt This drives up prices since the money supply has increased This in ation means the mark will depreciate relative to other currencies In this explanation domestic prices rise then German exchange rate depreciates Other explanation starts with balance of payments Debt payments in Germany are high so Germany will need a lot of dollars to pay its debts So the price of marks relative to dollars will fall This leads to the depreciation In this explanation exchange rate depreciates then domestic prices rise in Germany Workers and capitalists fight about who will shoulder burden of payments French reinvade Ruhr Valley Germans strike doesn t work out French withdraw Dawes Plan eases reparations payments Mechanics of stopping hyperin ation Pegged exchange rate more taxes burden on both capitalists and workers Lecture 9 May 1 2008 Cameron and Neal Ch 14 p348356 Events after WWI were a setup for the Great Depression Four basic culprits Monetary policy gold standard Consumption investment Trade policies Stock market and its relation to aggregate demand Market system was diminished as dominant paradigm Russia is now communist resources are not allocated by the market but by a central planner Rise of the welfare state unemployment insurance social security International capital controls prevent capital ows that would have mitigated effects of Great Depression We lack institutions that would be later created to prevent a repeat Bretton Woods institutions IMF World Bank WTO formerly GATT tougher financial regulations try to prevent another one In the Great Depression Output in US falls by 25 normally in a recession falls by 15 Industrial output falls by 50 Unemployment at 25 Investment falls to l of GDP It was a global concern though impact varied widely Interest rates Largest unbroken expansion until 1990s roaring 20s US growth based on consumer durables and construction fueled by Federal Reserve s accommodating stance left interest rates constant rather than raising them If interest rates went up it would be less profitable to lend to Germans which means that Germans couldn t pay allies and allies couldn t pay us Low domestic interest rates had made foreign yields attractive In 1928 party comes to an end Fed gets worried note graph of short term government bonds and raises the rates Fed worried that stock market overvalued people diverting resources from productive uses to buy stocks so if we raise interest rates it will make stock market seem less attractive and dampen stock speculation This leads to arbitrage capital ows toward America to take advantage of higher interest rates in US economy but in order to keep on the gold standard other countries have to raise their interest rates to prevent capital ight When fed raises interest rates this slows the growth rate of the money supply and then lowers output note chart that shows slowing growth of the money supply as interest rates rise When interest rates rise in the US capital stops owing to countries that need it most ows back to US to stop that foreign countries raise their interest rates Speculators ask are these countries really going to be able to stick by their currencies and raise interest rates to keep the capital there Raising interest rates which lowers output might not be credible So a speculator would think that this country would oat in the future So for now he will sit on dollars wait for them to devalue then change your dollars for foreign currency Foreign governments have to raise interest rates even higher to maintain credibility and prevent this speculation Since the less credible countries have to raise interest rates the most they are hit first by the depression Australia New Zealand Argentina Brazil Germany Poland So US exports fall since these countries cannot afford our goods note graph showing fall in US exports in late 1928 This is not just seasonal variation What made the depression so deep and so long Governments failed to respond Stock market boom and bust uncertainty from volatility consumption and investment International monetary system made things unstable monetary policy When banks fail they cannot share their knowledge of good and bad risks Retaliatory tariffs SmootHawley in USA trade Consumers have to compress their spending Wages were rigid but if they were allowed to fall firms would have been more likely to hire new people so wage rigidity perpetuates unemployment Tax increases Governments failed to respond When we re having a recession because of a heavy demand for cash or a decrease in money supply due to bank failures federal reserve is supposed to lower interest rates by raising the money supply But US Fed does the opposite decides there is too much money supply and they need to stop speculation Andrew Mellon was a liquidator wants to economically liquidate workers firms everything Gold Standard Matters Currencies are backed by gold and foreign exchange reserves Currency Gold Reserves of foreign currency Amount of gold in the world is fixed if foreign countries don t look credible you ll sell off foreign reserves and buy gold with that instead But every country does this So you need to raise interest rates even further to get the gold So you get higher interest rates shrinking money supply falling output and falling prices Was the Stock Market to Blame Uncertainty about stock price is much larger after crash Consumers are thinking ahead and want to be sure of what their incomes are in the future Consumers will buy goods perhaps on credit today anticipating future income When you re uncertain about future income you won t buy as many goods today Indeed consumer goods producers were hit the hardest What about banking panics Every gets scared that they won t get their money back so everyone goes and gets their money back On a normal day a bank doesn t have enough cash on hand to cover all deposits Some of it is loaned out When everyone shows up to collect their money at the same time bank tries to call in the loans Most people aren t going to be able to pay early so they ll sell their investments to try to repay the loan This has two bad impacts no loans since there is no money to lend out and lower asset prices due to people selling off collateral to try to repay the loans Fed should be a lender of last resort but it doesn t lend to these banks to bail them out What were the causes no branching no diversi cation too much competition banks making loans they shouldn t decline in industrial production makes banks less attractive to depositors if loans aren t pro table and being on the gold standard Some governments try to save their banks by lowering interest rates but due to gold standard xed exchange capital goes away Germany bound by law to stay on the gold standard so they have to let banks fail But Sweden and Denmark are not on the gold standard so they can lower interest rates without losing capital and save their banks Trade downward spiral Countries think that raising tariffs will protect domestic industry SmootHawley Tariff This will make it harder for people that owe the US money to service their debts This leads to debt defaults While tariffs could have raised prices it seems the monetary policy was more important Consumer credit Consumer items very important mini recession due to retooling for Model A If you miss a payment you lose the whole refrigerator even if you were close to paying it off So if you get red you ll reign in other spending so as not to waste the payments you ve already made Debt Default More of a symptom than a cause Countries unable to repay loans Not a terribly bad thing for a country when it defaults not necessarily much consequence Lecture 10 May 6 2008 Cameron and Neal Ch14 pp 348356 What s happening today Fed is lowering interest rates tax cuts bank bailout Bear Stearns Recovery from Great Depression Exchange rates were key Slide that shows ve countries that devalue in one year and begin their recovery in the next UK US Czech Belgium France Also note slides that shows inverse relationship between indexed exchange rate indexed to 1929 and industrial production or exports During devaluation countries lower the amount of gold you can get when cashing in currency After you devalue your currency is worth less so foreign countries can buy more of your products De ation higher prices lower real wages higher money supply interest rates fall Note slide that shows inverse relationship between real wages and industrial production Another slide shows inverse relationship between investment Tobin s Q and exchange rate Are Devaluations are BeggarthyNeighbor Somewhat since your goods are cheaper for your neighbor he pays for your recovery But when one country lowers their interest rate this will spill over to other countries and this will stimulate aggregate demand Net result is ambiguous Global depreciation would help move real wages if nominal wages are sticky Who learned Stronger economic downturn led to earlier abandonment of gold standard France has a smaller depression and waits to get off of gold standard Where labor is strongest you see earliest departures from gold standard US is big exception to both of these it had a severe downturn and powerful labor but got off gold standard late History matters 7 before in the 1920s some countries had experienced high in ation these countries stayed on gold standard longer People fear distributional issues lenders lose during in ation since debts are easier to repay Powerful ethos to stay on gold standard Nazi Germany and other countries with capital controls stayed on gold standard and didn t increase their money supply even though they could have increased it US starts recovery in 1933 but won t achieve old GNP until 1939 Still high unemployment gt14 in 1941 Unemployment slowly recovering over period lots of ground to make up Bad industrial policy Monetary policy was bad got better then got worse mini recession in 1938 US Industrial Policy 7 NIRA 7 National Industrial Recovery Act Limit hours higher wages and legalization of cartels Government thought output was too high so turned to cartels to collude and keep output down and prices up fair prices But this was a misdiagnosis Output was actually too low because of low demand US Monetary Policy Money supply expanded at 10 per year between 1933 and 1936 But stopped between 1936 and 1937 because of increased reserve requirements Can it happen again More countries with oating exchange rates Fed sees a new dual role price and economic stability Tax cuts during recession natural stabilizer government was small before Banking insurance But think of Argentina Had gone to fixed exchange rate indebted itself too much central bank without independence speculators forced it off its exchange rate and into a depressing Japan has a real problem with bad debts in the banking system and government can t do anything for about a decade Lecture 11 May 8 2008 Cameron and Neal Ch14 pp 362371 Marshall Plan 7 about convincing people the market system is the way to go Not clear that Europe would be democratic or have a market economy Graphs of France and Germany show growth trends After WWI growth recovers and even surpasses pre 1913 trend Part of this is convergence catching up to where you should have been but not all Marshall Plan 19481951 13 billion from US about 2 ofrecipient s GDP Did not stimulate significant increase in investment rebuild extra infrastructure or pay for imports Gave political leverage to 1 promote mixedfree economy 2 promote political stability 7 balance budgets stable in ation 3 promote shouldering burden equally 7 less class con icts 4 building of a welfare state on top of market economy rather than building a welfare state instead of a market economy 5 avoid wars of attrition in political claims Americans took money away when policies were not in line with desired policy Brits lost money for spending too much on social services French lost credit until they balanced budget in 1948 Argument for why it wasn t all Marshall Plan MP was responsible for about 153911 of gross investment Suppose that rate of return on MP money was 50 If MP amounted to l of GDP then MP would raise growth by 12 of a percentage point per year Also much infrastructure see graph on railways had been rebuilt before MP kicks in Also massive growth rates were not because MP alleviated foreign exchange shortages Suppose governments would have used foreign exchange for production Suppose half of total output relies on coal and 7 of total coal usage is from imports Then lack of foreign exchange for coal can only reduce output by 35 Growth Layers Layer I Saw a phenomenal growth in GDP per capita Compare to 1915 trendline surpasses Layer II Trade Investment why are capitalists more willing to invest Higher investment in 195072 period is tightly tied to higher growth rates In ation is low and stable 7 surprising imagine AD AS framework growth should lead to in ation When you re beyond potential output it s hard to find workers so you raise wages and then prices go up When you have a demand driven economic boom you ll start getting some in ation Layer III Capital and labor engaged in a game with 2 equilibria One equilibrium has workers demanding wage increases leading to higher prices and less investment Other better equilibrium has low wage increases with low investment and high investment Good equilibrium is not time consistent plans aren t credible when the time comes you ll renege and not do what you promised going off a diet when you re hungry After investment is made factory is built workers would want to request wage increases After factory is profitable and workers have accepted low wages firms will want to keep pro ts for themselves and not provide any wage increases at all To avoid these two reneges we develop some institutions at the domestic level Monitoring 7 allows workers to sit at the board and know what the firm s plans are and what the profits are Bonding 7 firms and workers are given things by the government Government threatens to take these things away if agreement is broken Government gives tax breaks for investment and social security for workers that don t strike Coordination 7 National Wage Negotiation stops one industryfirm from raising wages and forcing all other industries to raise wages too A single firm will want to raise wages to get the good workers and take advantage of the low in ation that is provided since no other firms have raised their wages Interational Level Free trade institutions European Coal and Steel Community ensures Ruhr coal for French and Lorraine steel for Germans Open Markets 7 European Payments Union 7 limits ability to trade if they don t lower tariffs Payments 7 EPU lifts capital controls previously couldn t change currency without a government permit End ofthe Miracle 1973 Mainly just the end of catchup growth Other possibilities Oil shocks 7 but in ation 1960s starts before oil shocks occur 1970s Capital Mobility 7 workers could get left holding the bag if capital went over boards so workers would betray agreement but also capital mobility could have been used as leverage to make workers keep their part of the agreement ambiguous Interest groups 7 rising labor militancy in the 1960s Breakdown of BrettonWoods Lecture 12 May 13 2008 Cameron and Neal Ch14 pp 362371 Chapter 4 of Barry Eichengreen s Globalizing Capital Bretton Woods BW7 the agreement that bridged between the gold standard and what we have today what we have today is sometimes called Bretton Woods II Balance of payments identities 7there is the trade and income side and there is the capital income side with reserves CA current account trade balance ie EXIM KA capital account capital ows ie capital in ows borrowing from the rest of the world and capital out ows lending to another country Reserves foreign reserves US treasury bonds gold CA kA reserves If you re running a trade surplus EX gt IM then there are going to be capital out ows or reserve increases you ll have some savings and you ll have to be lending it out to the foreign country or you will accumulate foreign currency and put it in the bank increasing reserves If you re running a deficit you can sell bonds to foreigners you could sell equity in your company to a foreigner In the BW period you re going to have to borrow from the IMF or you re going to have to lose reserves Foreign lending is going to be limited until 1972 Interwar period review Lost faith in the market rise of socialism Instability blamed on speculation Exchange rate depreciations had been competitive and beggarthyneighbor Cooperation was lacking Debtors had to bear the burden of adjustment 7 no credibility so they had to de ate their economy even more raise interest rates even more than they would have otherwise Creditor countries didn t have to bear any burden didn t loan extra money in hard times Goals Do everything oppositely from interwar period more stability more cooperation ease adjustment in balance of payments for debtor countries eliminate destabilizing international capital ows set up institutions outside of the domain of countries to prevent competitive devaluations Wanted xed exchange rates so international trade could ourish What did we get We got xed but adjustable exchange rates If there was a fundamental disequilibrium a country that runs persistent de cits you could devalue Capital controls 7 limits foreign residents from buying assets in the country Dollarcentric system 7 countries use dollars as reserves to back up currency IMF 7 monitors economic policies and to nance balance of payments de cits Since cross boarder capital ows are shutdown you have to either get loans from IMF or deplete your reserves How the system worked in practice Fundamentally weak since the dollar is the only reserve currency Fixed by adjustable exchange rate is an oxymoron 7 adjustments were rare looked weak when they did it led to further trouble IMF surveillance was weaker than intended Capital controls worked in 40s and 50s but became dif cult to maintain No adjustment mechanism 7 debtor countries need to pay of debts one adjustment possibility is that you devalue but not possible here other possibility is that you raise interest rates when you re a de cit country demand falls prices fall imports fall exports rise that allows you to pay off your debts Expenditure switching 7 when you devalue makes your exports more attractive to others and imports less attractive to your citizens Expenditure reductions 7 balance of payments UK wanted exible exchange rates current account controls tariffs quotas and rationing foreign exchange surplus countries to fund de cits up to 23 billion US wanted xed exchange rates free owing capital limited liability for surplus countries only 2 billion Got xed but adjustable exchange rates capital controls but no current account controls and IMF with 9 billion in lending rights Initial IMF drawing rights were 8 billion Compare to Marshall Plan which extended 13 billion IMF very small Initial par value exchange rates were unworkable In 1949 European currencies devalued by 30 Severe underestimation of costs of reconstructions Weakness of Dollar at Center By the 1950s and 1960s the US was running consistent de cits major problem when that s your peg currency Too many dollars out there Dramatic shifts in reserves US had 23rds of global monetary base in 1948 by 1958 gure was 12 Strong currency countries French did not want weak currency countries US to continue living beyond their means Exorbitant privilege of US 7 US can issue paper money with very low interest rates US can run de cits since other countries need to buy up dollars as reserves Trif n Dilemma 7 the problem is that the system continually needs more dollars to keep going via US de cits but if too many dollars are provided it won t be able to back its dollars up with gold Potential bank run situation this is the key weakness eventually were just too many dollars out there Need liquidity to maintain the system but more liquidity you need the smaller the ratio of gold to liquidity Stop Gap Measures Capital controls were there to prevent speculation on par values they worked partially interest rates were different in different markets demonstrates capital is not owing to where it is most needed Holding gold abroad collecting gold coins illegal Currency swaps 7 foreign countries agree to not sell the weak currency Germany forced to not sell dollars Others Collapse Germany stops supporting the dollar people change dollars for marks since it s a more credibly central bank Mark appreciates Nixon closes gold window and slaps a 10 surcharge on imports IMF told later 7 not effective watchdog Smithsonian Agreement 7 US dollar devalued by 8 and other countries revalue so real US devaluation around 15 The US makes no commitment to defend gold parity 1973 Europeans oat currency Lessons Important to have an adjustment mechanism adjustable peg never worked in practice no one wanted to do it Exchange rate systems have to be embedded in political bargains 7 big US de cits and hegemony worked during the cold war since the US was providing international security East Asian military adventures Vietnam and Korea were not liked Germany didn t like in ation there are political limits to cooperation Lecture 13 May 15 2008 East Asian economies are converging on Western and Western Offshoots lots of charts 7 countries with outstanding growth since 1950 China since 1978 Hong Kong Malaysia Singapore South Korea Taiwan Thailand some started tied with places in Africa Characteristics of growth in these countries High Investment Ratios Demographic transition go from high birth and death rates to low birth and death rates death rates fall rst so we get a high dependency ratio at rst lots of babies but later we get a high percentage of the labor force as adults so higher savings more investment high labor force participation High growth of exports except Japan Accumulation of human capital Foreign Direct Investment except Japan Import substitution 7 protect local industry close yourself off to global economy Export led growth 7 not necessary the cause here exports rose but with a lag Super cial explanations 7 Market oriented good income and land distribution initial human capital is high Hong Kong 7 nancial center low taxes cheap labor on doorstep FDI entrepot 7 goods can be imported and then exported without paying duties Singapore 7 strategically placed enlightened authoritarian high savings education FDI Taiwan 7 highly competitive small scale rms unlike Japan and Korea government less involved entry and exit by rms is fairly easy China 7 1978 market reforms state controls relaxed exports decentralized free trade zones still lots of State Owned Enterprises South Korea 7 government heavily involved with large scale industries large horizontal and vertical integration less government intervention since 1990s Proximate sources of growth Growth is not productivity growth GPD in growth of 68 factor productivity growth of negative 1 Singapore to positive 3 South Korea 3 is not high by international standards Growth accounted for by labor force participation increased education and investment Solow growth explains almost all in Korea and Taiwan in 19651975 and half between 19751985 Growth is not export led Doesn t look any more pro table to be an exporter in South Korea in 1969 than in 1959 Compare price of exports relatively at Also exports are too small of a share of GDP and are growing too slowly to explain the raise in GDP Government may have had a role in growth via investment coordination Economies start backward need signi cant investments for upgrades but there s a coordination problem Only want to invest if other companies are also investing in modern economy They will be able to provide you with high quality modern inputs into your process Want everyone to start investing in modern sector at the same time Hyundai and LG both have lots of vertical integration Start by importing machinery Why Asia and not Latin America Low dependency ratios high education land inequality was low few vested interests People paid off revolution political in ghting stops development in Latin America Other countries have tried similar policies with less success Govemment s role Subsidies taX incentives public investment administrative guidance Korean rms relied on cheap guaranteed public credit Taiwan 7 public enterprises get cheaper interest rates Coordination of investments Notes taken by Charles Stoecker in Econ 110B Meissner I took these notes for fun I take no responsibility for their completeness Lecture 1 April 1 2008 Why are economic historians relevant Path dependence 7 example about why we have qwerty keyboards Events in the past in uence things today Where you start determines where you end up Only reviewing 10 years of data will limit what you think is possible Need more data for more comparisons Clio 7 Greek muse of history Metrics 7 Measurement Cliometrics 7 measuring things in the past Cliometricians starting in the 1960s decided that historians had no grasp of economics Revisited history using the tools of modern economics slavery railroads immigration Economic historians are important because regular historians got it wrong What are the fundamental factors that determine divergence of growth Proximate causes 7 stuff you can measure and take an accounting of Growth in capital stock 7 extra machines Labor force 7 who are they supporting elderly children Human capital 7 knowhow Policies 7 gov protects property rights stability or is it arbitrary can you make a transaction with people from another country N Korea zoning laws Ultimate causes 7 underlying things Rules of the game 7 people don t kill arbitrarily Cultural norms 7 ways of interacting with merchants that keep people honest merchants give rotten oranges to customers that aren t likely to be repeats anyway Genetic makeup 7 patience willingness to follow ethical norms Integration and Growth 1830s1914 When you want to borrow you used to go and ask your local banker Savers in Western Europe supply capital for development in Turkey etc Disintegration and collapse 19141945 WWI in 1914 some signs of resurgence but clear by 1929 that its bad Argentina etc start defaulting on loans rise of dictators no one wants to loan to countries that default death of international finance Reintegration and further growth 1946 present In some ways we re less integrated than we were in 1910 General picture High integration in 1910 low integration between world wars high integration again today Did socialism work did import substitution work no Did exportled growth work 7 maybe Does unfettered capitalism work 7 probably not Could great depression happen again Used to be that countries could depend on each other to repay their debts wars showed that wasn t always the case Why is there the belief that free trade is harming people Lecture 2 April 3 2008 Economic Growth Neoclassical Production Solow Y f K L T land H human capital A 170 Y K 0 AL No equations on the exam Constant returns to scale double K double L then Y doubles How can something be CR8 and have diminishing marginal returns answer different things one changes both inputs other holds one input constant YAL y output per effective worker KAL k y k 0 alpha k sko n5gk k dot change in capital stock per effective worker k 0 alpha output s savings rate ie 20 for 20 ie how much of output we save n population growth rate ie 2 delta depreciation of machines g growth rate of techonology A Go through effects of changes of different variables on the Solow diagram What happens when k lt k You get convergence ie Japan Solve for growth rate of Y L answer g What caused the Industrial Revolution Not Labor 7 population didn t take off until after the revolution Land 7 not much land other places had a lot of coal Capital accumulation Differences in growth ie A come from technology institutions legal system that protects investors from the king govt policy tax moneytary Zimbabwe price controls printing lots of money human capital Convergence 7 some countries can catch up poorest countries grow the fastest Japan caught up to Australia since 1870s but some countries do not converge why Lecture 3 April 8 2008 Lewis Model Observed lots of people doing nothing on a farm earning very low wages Production asymmetry 7 traditional sector T uses no capital Organization Asymmetry 7 W MPL in modern M W gt MPL in traditional Farmers have nearly zero MPL food just grows output is just split up Wages stay low in T since labor supply is completely elastic Problems with model predicts more unemployment in T but observe it in M See wages rise in LDCs less developed countries Empirically surplus labor is not necessary or sufficient for growth New Growth Theory Ideas are the source of tech growth Growth fueled by economies of scale large scale feasible resources pop transportaion economies of scale viable homogenous goods human capital universities then productivity is selfreinforcing Monopolies 7 Microsoft version of growth Convergence OECD countries converged but larger sample shows divergence Abramovitz 7 some countries don t have the social capability to converge Institutions adaptability competition exible labor force macroeconomic stability Schupiter 7 creative destruction continuous process of renewal Note slide sorted by GDP in 1870 Japan is at the bottom but has the highest growth rate between 196094 Evidence of convergence within this set of countries But wider sample of countries shows divergence richest countries grow the fastest Compare the OECD slide vs the 118 country slide one shows convergence other divergence Great Britain s Industrial Revolution IR was a gradual process only a few industries Textiles Iron Coal Engineering Causes Competitive markets previously only markets in luxury goods IO supervisors scale 7 fixed capital quality control Indicators income per capita up industrialization composition of L force number of children down decreasing n Patent rate increases from 1700 Produced about 30 of world s industrial production in 1870 By 1841 only 20 of labor force is benefiting from new techs Ag still largest employer of labor until 1921 Living standards in GB were high since 1500s Before 1750 growth fueled by trade but checked by population GNP growth rate was 25 during its peak supremacy 18561873 lower than France Germany US Possibly explained by failure of entrepreneurship Britain failed to adopt the Thomas Gilchrist steel making process invented in Britain and thus had to import 13rd of its ore instead of using the domestic phosphorus ore See also failure to adopt textile tech from US soda tech from Belgium and new furnaces Due partly to lack of universal elementary schooling and distain for technical studies at universities Still RIPC jumped 25 times between 1850 and 1914 Lecture 4 April 10 2008 German One of the last early industrializers Numerous political divisions with separate monetary systems 1800 Germany has lots of agriculture feudalism Trade stagnant Germany a loose connection of states internal tariffs High rates of literacy long lifespans protoindustry homemade crafts Lots of universities due to inter state rivalries Three periods of development great land reform internal integration pushes ahead in later years 1807 First Period 7 emancipation of serfs markets allow sale of lands ow of private capital increases into farm production allows a larger industrial class increased inequality Edicts allowed the nobility to engage in bourgeois occupations commerce and industry without derogation to their status and established first modern educational system Moves from high fertility and death rates to low death rates and low fertility decrease n Higher savings and investment Fertility not sensitive to economic change mortality is 1833 Second Period 7 Zollverein toll union no internal tariffs low external tariffs politically to exclude protectionist Austria from joining Railroads ourish in response to elimination of tolls and competition between states Increased use of coal in Ruhr Valley Note that we also see a demographic transition here first falling death rates then falling birth rates this is accompanied by increased savings 1870 Third Period 1871 FrancoPrussian War Germany wins gets AlsaceLorraine and 5 bil francs Dye industry was the first in the world to establish its own research facilities and personnel Expansion into world markets monopolies Largescale industry capital goods and intermediates draws on university trained labor Some industries have increasing returns to scale steel chemicals but also cartels legal Goods priced high domestically but low below average cost internationally USA Growth rates of 2 per year since 1870 Extensive growth before 1870 adding more inputs T K Intensive growth after 1870 more A This is new growth theory large scale of US explains almost everything Big population increases natural and immigration yet labor still very scarce Puts a premium on labor saving techs Europeans got more yield per acre Americans got more yield per worker Vast land allowed regional specialization vast population big market with no arti cial trade barriers Needed a trade network to take advantage Rail making becomes the largest industry as measured by value added by manufacture Lots of resources lots of consumers well educated labor force good patent system America never had a protoindustry unlike UK and Germany America had a lot of land produced cattle butter cheese 7 income elastic luxury goods unlike UK which produced income inelastic grain which requires lots of workers for fall harvest Hard to staff factory in harvest season in UK Before 1860 manufacturing was decentralized changed with creation of managers Railway shows other industries how to set up hierarchical management Horizontal integration Rockefeller Standard Oil owns 90 of refining capacity 1878 Vertical integration Carnegie Steel 60 of market coal iron transport and production Japan Tokugawa government closed off to outsiders literacy rates like poor parts of Europe good credit system and well established goods markets US forces Japan to open in 1854 leads to revolt and restoration of Emperor in 1867 Meiji Restoration brought about implementation of western methods Scholars went abroad to study systems that were adopted at home Meiji Restoration 7 economic growth of 3 per year industry 5 more than Europe Enacted a land tax based on productive potential of land enforced efficiency Also ended feudalism land reform Openness caused the death of the cotton industry later some rebirth but raw silk production ourished Government established model enterprises and later sold them off to private interests WWI great boon to Japanese heavy industry India Central planning corruption rent seeking Closed economy import substitution Lecture 5 April 15 2008 reading p290299 Growth Wrap up Great Britian 7 was first gradual buildup of tech institutions culture conducive to growth Germany 7 good initial conditions literate labor force large factor endowments Japan 7 good initial conditions literacy openness to innovation and good hygiene USA 7 good initial conditions large factor endowments scale India 7 unfavorable initial conditions lots of disease corrupt institutions 1950s strong interventionist government International Trade Adam Smith 7 the division of labor is determined by the extent of the market Not about comparative advantage that s Ricardo When the economy is small you can t specialize as intensely as you can when there are many producers So you trade to increase the size of the market Talked about absolute advantage France is better at making wine than Scotland David Ricardo 7 some countries have absolute advantages He assumed Portugal had absolute advantages in wine and cloth making but Britain could have a comparative advantage in cloth making giving up RELATIVELY less wine when making cloth HeckscherOhlin trade theory Relies on factor endowments to explain why countries trade 6 assumptions Labor and other factors move from sector to sector freely One country uses labor intensely the other uses land or capital intensely Europe is abundant in L USA abundant in K and T There is free trade in international goods No transportation costs or tariffs Technology for producing European and US goods is the same No country is better at doing something This might be more convincing since technology seems to be copy able Tastes are the same across countries two consumption goods clothes and sheet metal To illustrate draw a PPF Draw utility curve Tangent line is price ratio slope price Xprice y After trade can consume outside PPF and have higher utility but by definition have to produce on PPF Implications Price Convergence 7 as tariffs and transportation costs fall prices should converge Cars should cost the same in Europe and America as integration increases Stolper Samuelson Theorem 7 prices of the relatively abundant input factor should rise So price of capital the abundant factor here at that time rises in USA price of labor wages falls in US There is some evidence for this Also since grain prices fall in Britain price of land the scarce factor there falls Consumers get more of the good they don t specialize in and at a lower price Evidence Exports as a percentage of GDP rise to 1913 fall then start rising again to present Trade with costs neither autarky nor free trade Draw supply and demand curves Draw a smaller Q than intersection Difference in price to produce low and price faced by consumers high is the cost associated with transportation Note deadweight loss triangle Evidence Look at graph of freight costs and NYC to London wheat price gaps both falling But look at tariffs another part of trade costs rising slightly until 1913 Lecture 6 April 17 2008 Tariffs increase at the end of the 1800s In Germany agriculture and manufacture band together for protectionism Financial panic in 1873 High protectionism in Latin America Corn laws 7 protectionist legislation in England focal point of resistance to import taxation by manufacturers eventually repealed by Robert Peel in 1846 after Irish potato blight other duties repealed soon after customs revenue greater in 1860 than 1842 France and Britian trade treaty signed in 1860 7 reduced extreme French protectionism introduced Most Favored Nation status if one of the two negotiates better rates with a third country the other of the two also gets those rates followed by a network of treaties in Europe so that when one negotiated reduced tariffs all got reduced tariffs Depression of 1873 7 financial panic European farmers had been seeing more competition due to lower transport costs Bismarck curries favor with farmers and industrialists who had previously wanted it by the reinstitution of tariffs in 1879 Wages go down in Argentina when they start trading with Britain Argentina has a comparative advantage in land intensive goods grain So it shifts production away from cloth to grain to take advantage of the gains from trade So wage falls in Argentina Migration In US before the 1920s passports weren t necessary Some limits to Chinese immigration none to immigrants from Europe North America Argentina Brazil and Australia are receiving lots of highskill immigrants during this period This is not so for Argentina and Brazil today Back in the 1800s both were very labor scarce On paper Argentina was a world leader in income per capita since labor is so scarce Motives for moving People move for economic reasons increases in relative income not necessarily absolute income Demography in sending country affects who moves Need to explain why it took so long for migrations to catch on America has always been labor scarce why didn t immigration peak until the l9Lh century Need a few enterprising members of the village to go abroad and bring back news about how it is on the ground in America Irish famine in the 1840s A million people leave Ireland during the family That burst establishes a network of informational ties Subsequent waves are also high due to the network Net economic benefit for moving Dwf7whizicvgt0 D decision migrate ifthis is 1 stay if it s zero Wf wage in foreign country Wh wage in home country Z compensating differential how much worse it is in foreign country C cost of migrating lower when people you know have already migrated V individual characteristics familial circumstances preferences for adventure Italians and Poles don t migrate rapidly to USA until later Transportation costs are falling during this time But the other parts of the cost of migrating the parts diminished by the extent of the social network fall for European communities at different rates Emigration from Europe peaks around 1905 and regresses since the wage gap between source and destination country is closing Cycle of immigration 1 Low initially Credit constraints information sparse few connections 2 Upswing Demographic effects fall in death rate before fall in birth rate population increase urbanization cost of moving falls 3 Plateau and regression Wages converge less incentive to move Data from USA 7 migration increases during economic expansion and falls off during economic contraction Immigration pushes wages down in the receiving country Most plausible case is Europes wages are rising both due to focusing on stuff that requires lots of labor and due to labor leaving for USA Immigrants are generally low skilled especially during the early 1900s These are substitutes for low skilled natives so this brings down the wage But these are complements for high skilled natives so this brings up their wage Supply shift out in low skill labor market demand shift out in high skill labor market Instant adult hypothesis 7 Most immigrants in the early 1900s especially are adult men ready to work so society can spend capital on physical improvements rather than raising new workers to adulthood This means immigration could be an overall bene t Spain has a depreciating exchange rate 7 makes immigration more costly Also a falling population lowers immigration pressure Not much immigration from Africa because of credit constraints Lecture 7 April 22 2008 Trilemma a country can have two of these three Integration of capital market allow your citizens to buy foreign assets exchange money Domestic monetary policy 7 control by central bank of money supply or interest rates to achieve full employment alternative is not changing interest rates during recession etc Fixed exchange rates 18501913 integration xed exchange rates 19201939 attempted to have them all gt crisis 19501972 domestic policy xed exchange rates 1972 domestic policy oating exchange rates How to measure integration Price comparisons 7 England good at labor intensive stuff ArgentiniaUS good at land intensive stuff arbitrage brings prices together evidence of convergence suggests integration Does the government limit cross border investment Look at foreign assistsgdp high then falls to interwar period rises again in the 1970s Same picture in liabilities Under integration we should see convergence of real interest rates real nominal 7 in ation after adjusting for risk compensation Evidence looks at interest rate differentials between BritianUS FranceUS Germany US Big differences in real interest rates provides opportunity for arbitrage If those differences don t disappear then that s evidence against integration 195070 more lasting differences in interest rates low integration 1990s very low interest rate differentials Capital Flows Capital should ow from where it is abundant to where it is scare rich to poor but it ows from rich to rich today This is due to risk capital controls information and trade costs In 1913 capital owed relatively evenly to rich and poor in 1997 owed almost entirely to the richest countries bar graphs Can also look at percentage of countries with capital controls Zero until 1919 or so About 80 today dip from 1960s where over 95 had capital controls


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