Saturday, 14 April 2018

Virtual Issue of the European Review of Economic History on Protectionism

Nikolaus Wolf is a professor at Humboldt
University in Berlin and an editor of the
European Review of  Economic History 
Protectionism is back on the political agenda and with it the question, how do trade and other forces of global markets affect our well-being? Trade theory suggests that specialization along comparative advantages is welfare increasing under a very broad set of assumptions. However, it also suggests that the gains from trade can be very unequally distributed, with a few big winners and a large number of losers. For the most important questions theory alone provides insufficient guidance due to the underlying contingencies: it all depends on institutions, on trade partners, sectors involved, expectations about the future and the like. Therefore, times of crisis direct us back to empirical evidence and notably back to historical episodes that were characterized by large shocks. Already during the late 19th century, the world experienced a period of rapid globalization followed by painful deglobalization. Was the “first globalization” accompanied by efforts to provide social protection for potential losers? What evidence do we have for the effects of tariffs on growth? How did the liberal era of free trade end and why was it so difficult to return to it?
In this virtual issue, we reproduce several papers that have been published in the European Review of Economic History over the last years, all of which address the historical experience of the first globalization, its end and attempts to reintegrate markets after 1945. Michael Huberman and Wayne Lewchuk (2003) discuss in their paper “European economic integration and the labour compact, 1850–1913” how indeed national governments faced with the pressures from globalization before 1914 responded with labor market regulations and social insurance. They show that workers supported free trade as long as they were protected against external risks. But growing pressure from global markets challenged the free trade regime. In his paper “Why Chamberlain failed and Bismarck succeeded: The political economy of tariffs in British and German elections”, Adam Klug (2001) compares the outcomes of three critical elections in European history, the 1877 and 1878 elections in the German Empire and the 1906 election in Britain. While free trade prevailed in Britain, the 1878 election resulted in a protectionist majority that not only shifted the political climate in the German Empire but also triggered protectionist responses abroad. Based on a specific factors model and new data, which allows comparing the two countries, Klug argues that not only economic interests, but also the political system and religious affiliations mattered for election outcomes. Similarly, Sibylle Lehmann and Oliver Volckart (2010)analyse the case of Sweden, roughly a decade later. In their paper “The political economy of agricultural protection: Sweden 1887” they ask to what extent the shift to protectionism in two elections in summer and autumn 1887 can be explained by changing economic interests. Using state-of-the-art techniques they conclude that the outcome of the election can only partially be rationalized and that non-economic factors and indeed “quirks of fate” (Lewin 1988) can sometimes be decisive.
James Foreman-Peck and Andrew Hughes Hallett and Yue Ma (2007) broaden the perspective and consider the experience of the Great Depression after 1929 in their paper “Trade wars and the Slump”. They analyze why international coordination failed and highlight the interplay between domestic and international politics, where domestic issues dominated. They argue that the largest players at the time, the USA and the UK, would have gained little from international cooperation in contrast to France and Germany. Hence, the return to free trade after 1914 was impeded by the unequal gains from international cooperation and large internal conflicts. The massive influence of the USA after 1945 brought free trade policies back on the agenda. This can be read as a warning for today that a slide to protectionism might be hard to reverse.
William Hynes, David S. Jacks and Kevin H- O’Rourke (2012) describe the deglobalization after 1914 in their paper “Commodity market disintegration in the interwar period”. First, they show that the First World War led to a fragmentation of markets, not at least to increased transportation costs. Second, they highlight that after a short period of reintegration in the early 1920s the great depression triggered a further and deeper fragmentation, this time largely due to protectionist policies including the break-up of the international monetary system. It took until the 1970s to reach again the 1913 level of commodity market integration.
Several papers contributed to the debate on tariffs and growth, by addressing the question whether protectionism can have beneficial effects on growth or not. In his paper “New results on the tariff – growth paradox” David S. Jacks (2006) reconsiders the evidence from Bairoch (1972) and O’Rourke (2000) on a positive correlation between economic growth and tariff levels during the late 19th century. First, Jacks finds that indeed tariffs seem to be positively related to growth even after controlling for several confounding factors but also that openness is positively related to growth. To solve this seeming contradiction, he points out that tariffs affect exports and imports differently and suggests that in a non-reciprocal trade environment tariffs might indeed have growth promoting effects. This is related to a large recent literature on institutional factors and the political economy of protectionism. Wolfgang Krause and Douglas J. Puffert (2000) provide an insightful case study on the German Empire before 1914 entitled “Chemicals, strategy, and tariffs: Tariff policy and the soda industry in Imperial Germany”. A key question here is whether protectionist tariffs in the chemical industries can explain the rise of the German chemical industry before 1914. They conclude that increased tariffs in the 1880s played some role for the success of this particular industry, but that other factors, notably independent technological change, were decisive.
A final set of papers analyses the political economy of agricultural policies, an area that was largely exempt from the market liberalization in the Western Economies after 1945. Mark Spoerer (2015) analyses the common agricultural policies (CAP) of the European Economic Community and asks to what extent they can be interpreted as part of the general expansion of the welfare state. In “Agricultural protection and support in the European Economic Community, 1962–92: rent-seeking or welfare policy?” he concludes that “the combined benefits from subsidies, import protection and political prices gave much more benefits to European agriculture than any welfare policy could have done”. Eva Fernandez (2016) puts this into a wider perspective using a global panel of countries for 1920 – 1970 in her paper “Politics, coalitions, and support of farmers, 1920–1975”. She highlights the role of the political system and shows how in continental Europe after 1945 proportional election systems and coalition governments helped to strengthen the political influence of farmers.
This small selection of papers published over the last years in the European Review of Economic History stresses how trade and welfare policies have always been related. It also shows that while the wider economic benefits from protectionism are uncertain at best, domestic policy considerations often trumped international cooperation already 100 years ago.

Saturday, 17 March 2018

ESTER Research Design Course, Cracow

Bartosz Ogórek is an Assistant Professor
at the Pedagogical University in Cracow
In November 2017 ESTER Research Design Course took place in Cracow, Poland. The event was organized by the Pedagogical University of Cracow (Bartosz Ogórek) together with Radboud University Nijmegen (Bram Hoonhout) and WEAST initiative (Mikołaj Malinowski). The main aim of the course is to help PhD students in setting up a high quality and well-designed plan for their dissertation in economic or social history. This goal was achieved by in-depth discussions of the papers prepared by the participants among them and under the guidance of a team of leading senior commentators. Cracow meeting provided a platform for communication for a group of 38 PhD candidates from both Eastern and Western Europe and 13 senior commentators. It is worth noting that for the first time in the ESTER RDC meetings students from Central and Eastern Europe constituted a significant group. Therfore, the programme can largely enhance the communication and cooperation between the scholars in the field based in different parts of Europe. Apart from the scientific programme participants and commentator took part in the social events and explored the city of Cracow.

Friday, 23 February 2018

The Gains from Import Variety in Two Globalisations: Evidence from Germany

Abstract of the new EHES working paper by Wolf-Fabian Hungerland

Wolf-Fabian Hungerland is a Doctoral Student
 at Humboldt University in Berlin
Globalisation is nothing new. Until the outbreak of World War I economies around the world found themselves in a process of integration that invites comparisons to today; just consider Germany’s globalisation experience (Figure 1). On the one hand, growing trade has been tending to expand the consumption opportunities for all. On the other hand, rising populism, both now and then, is—at least in part—fuelled by scepticism if not outright hostility to the international division of labour (Ferguson, 2016). This begs two questions: What are the gains from all that integration in these two episodes of globalisation? And what can we
learn about the structure of demand more generally?

Figure 1: German Imports, 1895-1913 and 1995-2013

One of the more tractable ways of getting hold of the benefits of economic integration to consumers is the idea that the expanding variety of a good yields gains from trade because consumers value variety (Krugman, 1980). That is, in a monopolistically competitive world, consumers prefer to have some choice over different versions of the same good. I operationalise this idea using a standard assumption in the analysis of international trade: Every country makes things slightly different from those made by other countries (Armington, 1969). That is, suppliers differentiate within the products they produce.

Based on the estimated elasticities, I calculate the consumer gains from growing import variety for the ’first globalisation’. The welfare calculations are presented in Table 1. The first finding that demand was more elastic in the first globalisation may imply that there are more welfare gains from changes in variety in the second globalisation. However, from 1907 to 1913, the welfare gain due to growing variety amounts to 0.2 percent of GDP to access the wider set of varieties available in 1913 rather than the set available in 1907. A century later it is only half of that, that is, 0.1 percent. These numbers small at first sight, but because we are looking at estimates of the ’incremental’ gains from import variety (Feenstra, 2010), and only seven-year periods, these numbers are plausible. The results are consistent with previous findings based on similar research designs.

I measure these gains by differentiating between how an exactly measured price index would move with and without changes in the variety of a given set of imported goods. This is Feenstra’s (1994) approach, which has been refined, among others, by Broda and Weinstein (2006). To perform such calculations, I need a measure of substitutability of goods between different source countries that indicates how elastic demand is for a given good, and on the aggregate level, how elastic import demand generally is.

Therefore I estimate elasticities of substitution—a key parameter in many studies of international trade and international macroeconomics—for all goods at various levels of aggregation for both episodes of globalisation, using Soderbery’s (2015) limited information maximum likelihood (LIML) estimator.

Figure 2 plots the distributions of the estimated elasticities, one for the first globalisation and two for the second globalisation, whereby one is based on countries defined by actual borders and one where I superimpose 1913-borders on the country set of today.

Figure 2: Distribution of elasticities of substitution

The results show that the elasticity of substitution varies over time, space and product. The median elasticity is 3.8 in the first globalisation, but only 2.5 in the second. To put this difference in perspective: In Krugman’s (1980) model, which I use to evaluate welfare, these elasticities translate to median mark-ups of 35 percent in the first globalisation but about 66 percent today on prices generated in a perfectly competitive market.

The finding that although demand was more elastic in the first globalisation, welfare gains from import variety were higher than can be explained by the composition of imports. In the first globalisation, variety growth was – in relative terms – stronger than in the second globalisation, at least in the period this article focuses on, as trade-weighted measure of variety growth - so-called lambda-ratios – suggest. That is, despite a much smaller set of goods and their varieties, Germany enjoyed twice as much welfare gains from newly imported varieties than it does today. This result is even more striking when considering that the level of protection ahead of World War I was much higher than it is today. This may reflect the fact that today many ’low hanging fruits’ in terms of variety have been harvested, which resonates with Bordo’s (2017) argument that the world economy’s pace of integration is slowing down or pausing, but not reversing.

A comparison between products and industries shows that the structure of demand is not easily approximated by using one single elasticity of substitution. Both the time horizon as well as the set of trade partners matter. Estimation results for good-specific elasticities of substitution suggest that there is substantial heterogeneity in terms of demand elasticity over goods and their varieties. Figure 3 plots the elasticities for the same three-digit industries, estimated for the first and the second globalisation. One prevalent assumption is that the elasticity for a given good is stable over time. The results show that this is not the case. There are industries that commanded a higher elasticity then but a stiffer demand now, and vice versa. Only a minority of industries experienced little change in demand elasticity. The same holds, even more strongly when going down to the product level. Of course, all this applies only to goods that were traded in both episodes of globalisation. 

Figure 3: Industry-specific elasticities of substitution compared

Based on the estimated elasticities, I calculate the consumer gains from growing import variety for the ’first globalisation’. The welfare calculations are presented in Table 1. From 1907 to 1913, the welfare gain due to growing variety amounts to 0.2 percent of GDP to access the wider set of varieties available in 1913 rather than the set available in 1907. A century later it is only half of that, that is, 0.1 percent. The welfare results seem small at first sight, but because we are looking at estimates of the ’incremental’ gains from import variety (Feenstra, 2010), and only seven-year periods, these numbers are plausible. The results are consistent with previous findings based on similar research designs.

Put differently, despite a much smaller set of goods and their varieties, Germany enjoyed twice as much welfare gains from newly imported varieties than it does today. This result is even more striking when considering that the level of protection ahead of World War I was much higher than it is today. This may reflect the fact that today many ’low hanging fruits’ in terms of variety have been harvested, which resonates with Bordo’s (2017) argument that the world economy’s pace of integration is slowing down or pausing, but not reversing.

Table 1 also reports welfare calculations based on different elasticities of substitution. Column (2) reports the welfare when the period-specific median elasticity, i.e. 3.81 for 1907 to 1913 and 2.47 for 2007 to 2013 is used. The welfare gains would more than halve in both episodes in comparison to the benchmark results on welfare in column (1). Column (3) gives the welfare results when the median elasticities of the respective other period is used. For the 1907-1913 period, welfare is lower by a quarter. For the 2007-2013 period, welfare falls to fifth. Column (4) takes the good-specific elasticities from the respective other period. Welfare turns out to be a fifth of the benchmark results for both episodes. Columns (5) to (7) use various uniform elasticities traditionally used in the literature. Welfare would turn out even lower. The bottom line of these alternative welfare estimates is: Using ad hoc elasticities or a set of good-specific elasticities originating from data other than that the researcher would like to explain can be misleading. This is not only relevant for welfare analysis, but it also applies to analyses that rely on the elasticity of substitution as a parameter to evaluate the effects of changes in trade costs.

The working paper of this article can be downloaded here:


Arkolakis, C., Costinot, A., and Rodríguez-Clare, A. (2012). New Trade Models, Same Old Gains? American Economic Review, 102 (1), 94–130.

Armington, P. (1969). A Theory of Demand for Products Distinguished by Place of Production. International Monetary Fund Staff Papers, 16, 159–178.

Bordo, M. D. (2017). The Second Era of Globalization is Not Yet Over: An Historical Perspective. National Bureau of Economic Research Working Paper Series, Working Paper Nr. 23786.

Broda, C. and Weinstein, D. (2006). Globalization and the Gains From Variety. Quarterly Journal of Economics, 121 (2), 541–585.

Feenstra, R. C. (1994). New Product Varieties and the Measurement of International Prices. American Economic Review, 84 (1), 157–177.

Feenstra, R. C. (2010). Product Variety and the Gains from International Trade. Cambridge, MA: MIT Press.

Ferguson, N. (2016). Populism as a Backlash against Globalization: Historical Perspectives. Horizons, 4 (8), 12–21.

Hausmann, R., Hwang, J., and Rodrik, D. (2007). What You Export Matters. Journal of Economic Growth, 12 (1), 1–25.

Hungerland, W.-F. and Wolf, N. (2018). Globalisation Then and Now: New Evidence From Germany. Institute of Economic History, School of Business and Economics, Humboldt-University of Berlin, mimeo.

Krugman, P. (1980). Scale Economies, Product Differentiation, and the Pattern of Trade. American Economic Review, 70 (5), 950–959.

Ossa, R. (2015). Why Trade Matters After All. Journal of International Economics, 97 , 266–277.

Schott, P. (2004). Across-product versus Within-product Specialization in International Trade. Quarterly Journal of Economics, 119 (2), 647–78.

Soderbery, A. (2015). Estimating Import Supply and Demand Elasticities: Analysis and Implications. Journal of International Economics, 96 (1), 1–17.

Wednesday, 10 January 2018

The long-term relationship between economic development and regional inequality: South-West Europe, 1860-2010

Abstract of the new EHES working paper by Alfonso Díez-Minguela, Rafael González-Valb, Julio Martinez-Galarragaa, M. Teresa Sanchisa, and Daniel A. Tirado:

Our paper analyses the long-term relationship between regional inequality and economic development. The literature points that, from a spatial perspective, the convergence process may display a non-linear evolution. In this respect, Williamson (1965) suggested that throughout the economic development process regional inequality exhibited an inverted U-shaped pattern. He observed that in the early stages of modern economic growth industrial activity was concentrated in specific locations while the rest of the regions remained largely agricultural. This in turn increased per-capita income inequality across regions. However, over the long term these disparities eventually disappeared. For a long time the Williamson hypothesis had no sound theoretical backing. However, Barrios and Strobl (2009), following the Lucas (2000) growth model, provided a theoretical foundation for the Williamson hypothesis in line with classic theorizing contributions on regional economic growth.

A small but slowly growing body of empirical works have tested the existence of a Kuznets curve in spatial inequalities. Importantly, due to limitations in the availability of historical data, studies have focused on recent decades. Barrios and Strobl (2009) and Lessmann (2014) confirm the existence of an inverted U-shaped pattern, and the latter also shows that spatial inequalities increase again at high levels of economic development. However, these studies examine the evolution and causes of regional inequality since 1975-80. And three decades can hardly capture deep structural changes. A more suitable way of approaching the topic would therefore be to study the evolution of regional inequality during the whole process of economic development, i.e. examining the long-term dynamics of countries since the early stages of modern economic growth. This would make it possible to account for the transition from agrarian to industrial and service-based economies.
Industrialization processes in Europe began during the nineteenth century when the novel technologies of the first and second industrial revolutions spread across the continent. As economic historians have already documented, the processes of industrialization were characterized by their regional nature (Pollard, 1981). Technological shocks, industrialization and structural change did not arrive in all regions at the same time and therefore not all regions became richer at the same time, and this led to an initial upswing in regional disparities, as suggested by Williamson.
Recent developments in economic history make it possible to study the long-term evolution of regional income inequality. In this paper we have collected figures for regional population and regional gross domestic product (GDP) for France, Italy, Portugal and Spain at the NUTS2 level, on a decadal basis between 1860 and 2010.

The next figure shows the regional per-capita GDP in each country (dark-coloured dots) compared to the average per-capita GDP for South-West Europe as a whole (solid line) for 1860-2010. The grey bars represent all the regions of the four countries taken as a whole. As can be seen, the graphs provide a more complex picture than the country-specific histories that have already been extensively documented in the literature. Indeed there are big differences within countries, and regions can be found in all of them with levels of income both above and below the average for South-West Europe.

Fig. 2. Regional per-capita GDP (1990 $ Geary-Khamis) by country, 1860-2010

In addition, relevant changes to the economic geography of South-West Europe occurred during the period of study. To explore the main geographical patterns in the spatial distribution of income, the next figure shows maps of regional per-capita GDP. The regions are grouped in quintiles for 1900, 1950, 1980 and 2010. Black indicates “very rich”, while the lightest grey indicates “very poor”. By 1950, most of the southern regions of Italy and the vast majority of Spanish and Portuguese regions were at the bottom of the income distribution. In both Spain and Italy there had emerged a clear north-south divide pattern, while in Portugal only Lisbon had respectable income levels. Furthermore, the rich regions were clustered in a gradient centred on the north of France around Paris (Île-de-France) and northern Italy. In short, it seems that a core-periphery pattern already existed in 1950.

Fig. 3. Regional (NUTS2) per-capita income in South-West Europe, 1900-2010

Next, we measure regional inequality using the population-weighted coefficient of variation. This indicator shows that there seems to be a general trend towards increasing regional inequalities in the early stages of modern economic growth. While convergence does at some point begin, the timing of the reversal from divergence to convergence varies across countries. By 1980 the inverted U seems to be complete in all four countries; over the last three decades regional catching-up has come to an end or even reversed. In order to further investigate these issues, we conduct a sound econometric analysis to empirically test the relationship between economic development and regional inequality. In so doing, we combine parametric and semiparametric techniques.
The next graph summarizes our findings. It shows a clear bell-shaped curve, supporting the idea of an inverted U-shaped relationship between spatial inequality (y-axis) and development (x-axis) over time. It also shows increasing inequalities at high levels of economic development at the upper tail of the GDP distribution.

Fig. 5. Semiparametric estimates (pooled regressions 1860–2010)

In order to further explore this issue, we next examine the potential mechanism behind the inverted-U curve suggested by Kuznets (1955) and Williamson (1965). These authors established that structural change is a major driver of regional inequalities, with the transition from agrarian to industrial economies being responsible for the evolution of these inequalities. A bell-shaped curve is again obtained. Thus, this result suggests that structural change (the shift from agriculture to industry) has caused the inverted-U pattern observed in the data.

Finally, we carry out several robustness checks. On the one hand, we consider alternative measures of inequality instead of the weighted coefficient of variation. On the other, to avoid any possible bias due to the predominance of the capital cities, we calculate regional inequality excluding the region in which the country’s capital is located. In all cases, the results show a clear bell-shaped curve.
All in all, three main results are obtained. First, the study confirms that, over the course of the historical process of economic development, regional income inequality has followed a U-shaped evolution. Interestingly, in the more recent stages of development the trend is on the rise again. This result is robust not only to the inclusion of confounding factors that may have an effect on regional inequality (the size of regions, trade openness, agglomeration economies and public policies), but also to the use of alternative measures of inequality. Second, our results also show that economic growth has been more intense in the most populated regions, which, in the context of the four South-West European countries studied, correspond to those in which the capital cities are located. The dynamism of these ‘capital’ regions could therefore explain the recent upsurge in regional inequalities. Third, in line with Kuznets (1955) and Williamson (1965), we identify structural change as being a significant transmission mechanism of the inverted-U relationship that we have found between economic development and regional inequality in the long term.

Barrios, S., Strobl, E., 2009. The dynamics of regional inequalities. Regional Science and Urban Economics 39 (5), 575-591.
Kuznets, S., 1955. Economic growth and income inequality. American Economic Review 45 (1), 1-28.
Lessmann, C., 2014. Spatial inequality and development. Is there an inverted-U relationship. Journal of Development Economics 106, 35-51.
Lucas, R.E., 2000. Some macroeconomics for the 21st Century. Journal of Economic Perspectives 14 (1), 159-168.
Pollard, S., 1981. Peaceful conquest: the industrialization of Europe, 1760-1970 (Oxford: Oxford University Press).
Williamson, J.G., 1965. Regional inequality and the process of national development: a description of the patterns. Economic Development and Cultural Change 13 (4), 1-84.