412 Globalization and Inequality, Past and Present
THE IMPACT OF GLOBALIZATION
ON INEQUALITY TRENDS, 1870–1913
Theory suggests that globalization can account for this key stylized fact: In an
age of unrestricted international migration, poor countries should have the highest
emigration rates and rich countries should have the highest immigration rates; in
an age of liberal trade policy, poor countries should export labor-intensive products
and rich countries should import labor-intensive products. Theory is one thing:
fact is another. What evidence on trade and migration in the late nineteenth century
supports this (apparently plausible) globalization hypothesis?
I start with trade effects. There was a retreat from trade liberalism after 1880,
and the retreat included France, Germany, Italy, Portugal, and Spain. In the absence
of globalization forces, poor labor-abundant countries that protect domestic industry
should raise the returns to scarce factors (such as land) relative to abundant factors
(such as unskilled labor). In the face of globalization forces, the same countries
should at least mute the rise in the relative scarcity of unskilled labor and thus
stem the fall in inequality. The evidence seems to be roughly consistent with
these predictions. That is, the correlation between rising inequality and initial
labor scarcity turns out to be better for 1870–1890—an environment of shared
liberal trade policies—than for 1890–1913—an environment of rising protection
on the Continent.
I turn next to the impact of mass migration. As indicated above, the impact of
mass migration on labor supplies in sending and receiving countries between 1870
and 1910 ranged from 37 percent for three New World destination countries (Canada
at 44 percent absorbing the largest supply of immigrant labor) to -18 percent for
six poor European sending countries (Italy at -39 percent losing the largest share
of its labor supply). Migration’s impact on the receiving country’s labor force is
also known to be highly correlated with an initial scarcity of labor, although not
perfectly. Migration is therefore a prime candidate in accounting for the distribution
trends. Figure 3 plots the result: where immigration increased the receiving country’s
labor supply, inequality rose sharply; where emigration reduced the sending
country’s labor supply, inequality declined.
Unfortunately it is impossible to decompose globalization effects into trade
and migration using this information because the correlation between migration’s
impact and initial labor scarcity is so high. Yet an effort has been made by
constructing a trade-globalization-impact variable as the interaction of initial labor
scarcity and “openness.” The result is that the impact of migration is still powerful,
significant, and of the right sign: when immigration rates were small, inegalitarian
trends were weak; when emigration rates were big, egalitarian trends were strong;
when countries had to accommodate heavy immigration, inegalitarian trends were
strong. In the Old World periphery, where labor was most abundant, the more
open economies had more egalitarian trends, just as the Heckscher-Ohlin trade
model would have predicted. It appears that the open economy tigers of that
time enjoyed benign egalitarian effects, while those among them opting for autarky
did not. In the Old World industrial core, this effect was far less powerful. It
appears that open economy effects on income distribution were ambiguous