Trade and Poverty: When the Third World Fell Behind

Published by EH.NET (July 2011)

Jeffrey G. Williamson, Trade and Poverty: When the Third World Fell Behind. Cambridge, MA: MIT Press, 2011. xii + 301 pp. $35 (hardcover), ISBN: 978-0-262-01515-8.

Reviewed for EH.Net by Tirthankar Roy, Department of Economic History, London School of Economics and Political Science.

Through a process of unprecedented market integration, a world economy emerged in the nineteenth century. Trade barriers fell, trade costs came down, and empires unified territories. Commodities were traded on a larger scale than ever before; labor, capital, and knowledge joined the basket of tradable; and new land frontiers opened up in order to feed industrial cities. In an earlier work with Kevin O?Rourke (Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy), Jeffrey Williamson has shown that increasing trade led to specialization and factor-price convergence on both sides of the Atlantic. Trade was not only an engine of economic growth but also aided transmission of growth until a ?backlash? began to form in the interwar period. Yet, if trade induced convergence of standards of living in the Atlantic world, it seemed to make the whole world more unequal in the nineteenth century. Did ?globalization? cause ?divergence??

Trade and Poverty argues that globalization increased world inequality by causing ?deindustrialization? in the commodity exporting third world. On the eve of the trade boom, the Industrial Revolution had begun in Europe. Other regions of Western Europe followed Britain?s lead. The trade boom was driven by a large fall in the prices of manufactured goods produced in Western Europe, and a rise in the demand for primary commodities available in the tropics. So large was the rise in demand and so large the technological leap that they jointly led to a long-term increase in the terms of trade, or the price of tropical exports as a ratio of the price of its imports. W. Arthur Lewis among others considered that the rise in the terms of trade was one of the drivers of tropical development. Williamson agrees, but adds to the picture the negative deindustrializing effects of relative price changes.

Chapters 1-5 of the book demonstrate, with facts and theory, the link between trade and inequality; place the timing of the terms of trade movement earlier than the conventional date, that is, in the first half of the nineteenth century rather than the second half; and with reworked datasets compares the major third world regions on the extent of terms of trade changes. Chapters 6-8 conduct three case-studies of deindustrialization ? India, Mexico, and the Ottoman Empire. Chapter 9 asks whether inequality within the commodity exporting regions increased, and if so, whether the increase was due to the terms of trade changes. Chapter 10 shows that price volatility in commodity export was relatively high, adding to the growth depressing effects of terms of trade changes. Chapters 12-14 add afterthoughts and draw out the ?morals of the story.?

Deindustrialization is the main moral of the story, and it is necessary to discuss the idea fully. The terms of trade boom had comparable effects upon the Atlantic economy and the rest of the world. In both cases, there was specialization and economic growth. The tropics experienced a better utilization of idle land and mining capacity, and could buy manufactured goods in increasing quantity and increasingly better quality over time for an unchanging bundle of primary products. But then, industrialization entailed greater prospects of endogenous growth, human capital accumulation, and increasing returns to scale; land-intensive growth faced diminishing returns. The tropics were deprived of the spill-over benefits of industrialization. Furthermore, the tropics experienced a decimation of its own artisan manufactures. There was ?Dutch disease? or a shift of resources away from other sectors towards exportable goods, and more exposure of the export economies to commodity price fluctuations. These effects could reduce the gains from trade for the commodity exporters compared with the gains that accrued to the manufactured goods exporters. This is how trade led to more inequality. Williamson is silent on ?poverty,? which figures in the title of the book but not in the index. Did trade cause poverty, or fail to remove it?

To show how the mechanism works, a model of a third world economy is developed. The economy has three sectors, grain, exportable commodity, and import-competing textiles. The real wage in grain units is set at the subsistence level. A fall in textile price (domestic producers are price takers) implies a rise in own wage in textile production, and consequently, a fall in labor demand in textile production. This is classic deindustrialization, and the effect is stronger the greater are the specialization and terms of trade shifts. The model allows for another pattern of deindustrialization, however. A rise in grain prices due to ?war, pestilence or the absence of the monsoon? (p. 56) would raise the nominal wage in textiles and again impart a depressing effect on labor demand there. War, pestilence and failure of monsoon live uneasily with the main thrust of the book, namely globalization. But Williamson needs them, as we shall see.

For the most part, the empirical-illustrative section of the book is persuasive. Given the economical yet versatile analytical frame, the reader never loses sight of the point of the numbers. Williamson?s own previous work, singly or with others, has been seminal in establishing the empirical foundations of globalization and world inequality. This book benefits from that accumulation of statistics and analytical insight. The three case studies ? India, the Ottoman Empire, and Mexico ? are excellently researched and executed. Above all, the book is mindful of the exceptions to the rule.

Over half of the population of the third world does not fit the predicted mechanism of divergence neatly. In East Asia, terms of trade fell in the long run. In South Asia, the rise happened earlier and to a much smaller extent than in Southeast Asia, Latin America, the Middle East, and the European periphery. In India, a large deindustrialization coexisted with moderate terms of trade gains, whereas the theory predicts that big specialization entails big changes in terms of trade. How does the book handle these exceptions? China?s trend is only briefly discussed. And chapter 6 handles the Indian situation with originality, but not sufficient persuasive power.

Williamson?s solution to the Indian paradox is war, pestilence, and failure of the monsoon. The disintegration of the Mughal Empire and more frequent droughts caused agricultural productivity to fall and grain prices to rise in India, which ushered in a deindustrialization. The evidence for any of this is ?particularly thin? (p. 81). The wage and price statistics quoted are not detailed enough for a part of the world where regional differences were large. Historians of India have long known that Mughal collapse and economic dislocation did not go together. For example, the regions that led cotton textile production in the eighteenth century were located near the seaboard or within easy access from it, whereas imperial collapse affected regions that were located hundreds of miles into the interior. Anarchy in Rohilkhand, which is discussed, should not affect the weaver in Bengal. The peninsula by and large did not form a part of the Mughal Empire. In textile producing seaboard states, such as Bengal, which broke away from the Empire about 1715, there was agrarian expansion and clearing of the forests. It is not definitively known if the frequency of droughts did in fact increase; where in India it did; whether the droughts were a random risk or a systemic one; if a systemic one, why environmental change affected only India; and why the failure of rains should reduce land yield permanently.

If we remove war-pestilence-drought from the analysis, does the analysis lose bite? Not necessarily. One possible response to the paradox is that India did not deindustrialize as much as the book claims, and as much as the other regions did. After all, in 1911, four million artisanal textile workers earned a living in India. Williamson thinks India was exceptional in suffering an acute deindustrialization; in fact, India was exceptional on the point of survival of artisanal textiles on a gigantic scale. Such survival can be explained by (a) adding to the story a differentiated consumption pattern in the textile importing countries, and (b) making a distinction between cotton yarn, where price effects were devastating, and cotton cloth, where they were not. The upshot is that the extent of the fall in textile employment was of a comparatively moderate order in India. Recent scholarship on craft history has followed these roads; the book seems unaware of the literature.

More fundamentally, it remains questionable how much of world development globalization explains after all. The world is actively trading now. And poverty persists too. Clearly, some poverty and some poor regions are immune to globalization. Because they are, the big challenge that the present pattern of economic growth poses in India, China, or Africa is emerging regional inequality. Likewise in the tropical trading world of the nineteenth century, globalization transformed some regions and left others untouched. Bombay narrowed its gap with the Atlantic world, Bundelkhand fell further behind. Seen from the third world perspective, the so-called ?great divergence? would seem to be a trivial issue. The really useful question is not why ?India? fell behind Britain ? ?India? did not ? but why Bundelkhand fell behind Bombay. Williamson?s method of explaining inequality, with reference to the wage-rental ratio, does not answer the question. A simpler model would note the persistence of high trade costs and the availability of too little tradable surplus over subsistence in large parts of the arid tropics, where land yield continued to be very low.

A further problem with the approach is anticipated in the book. It takes industrialization as a given. But why did industrialization have to start in Europe in the first place? What factors prevented the third world from industrializing first? Why did the industrializing impulse cross some borders but not others? These questions the book wisely does not engage in save a few customary citations from the institutionalist literature, which does not offer much on the institutional history of the five and a half billion people who live in the poorer world today. But then, a very important part of the phenomenon of forging ahead and falling behind remains outside the model.

Still, Trade and Poverty is undoubtedly an important and authoritative work, one that should take the current discourse on globalization and divergence to a new level. It shows the utility of thinking about world development in terms of patterns of trade, and also shows the pitfalls, thanks to Williamson?s cautious and reliable handling of the data. It justifies the reputation of its author as one of the architects of neoclassical economic history.

Tirthankar Roy is the author of The Economic History of India, 1857-1947 (Oxford University Press, Third Edition, 2011), and India in the World Economy from Antiquity to the Present (Cambridge University Press, forthcoming).

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (July 2011). All EH.Net reviews are archived at http://www.eh.net/BookReview.