FACTOR PRICES AND INCOME DISTRIBUTION IN LESS INDUSTRIALISED ECONOMIES

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1 Blackwell Publishing AsiaMelbourne, AustraliaAEHRAustralian Economic History Review The Authors; Journal compilation Blackwell Publishing Asia Pty Ltd and the Economic History Society of Australia and New Zealand 2006March IntroductionFactor prices and income distribution in less industrialised economies David Greasley, Kris Inwood and John Singleton Australian Economic History Review, Vol. 47, No. 1 ISSN March 2007 doi: /j x FACTOR PRICES AND INCOME DISTRIBUTION IN LESS INDUSTRIALISED ECONOMIES BY DAVID GREASLEY, KRIS INWOOD AND JOHN SINGLETON University of Edinburgh, University of Guelph, and Victoria University of Wellington Global trade expansion after 1870 had potentially powerful effects on income distribution, especially in land-abundant less industrialised economies, by increasing land prices relative to wages. The papers in this issue add evidence on wage rentals for a range of countries, specifically Australia, Canada, Ghana, India, and Sweden. These new data offer partial support for Jeffrey Williamson s view that the distributional effects of booming global trade to 1914 were powerful and ubiquitous, but they highlight that more attention might be given to geographical boundaries and to other distribution forces including technology and wage bargaining conditions. JEL categories: F20, N30, N31, N33, N35, N37 Keywords: factor market, factor ratio, globalisation, land price, rent, wage In wide-ranging and hugely influential work Jeffrey Williamson has argued that transport innovation-driven global trade expansion after 1870 was accompanied by commodity price convergence. Price gaps for a wide range of manufactures, raw materials, and foodstuffs narrowed dramatically around the Atlantic economy. Freight factors also declined sharply for less industrialised economies, for example, the gap between the London and Rangoon price of rice was down to 26 per cent by 1913, and the London Calcutta jute price gap fell to four per cent. 1 For Williamson, commodity price convergence had powerful income distribution effects around the world economy. He argues for European economies that wage earners benefited and income distribution became more even. For many parts of the less industrialised world his analysis points to a rise in income inequality. The link from commodity price convergence to income inequality centres on the implications of the global trade booms for relative factor prices, specifically for the ratio of wages to the rental price of land (wage rentals). Commodity trade 1 Williamson, Land, Labor, p

2 2 David Greasley, Kris Inwood and John Singleton booms of the late nineteenth century raised land prices around many parts of the less industrial world, including in Australasia, the southern cone of the Americas, and in parts of South and Southeast Asia. These economies experienced especially sharp increases in their terms of trade, as the price of agricultural goods and raw materials rose relatively to the price of manufactures. Concomitantly land prices boomed around the land-abundant periphery. Shifts in relative commodity prices favoured the less industrialised, land-abundant periphery, and the effects, for Williamson, were magnified in relative factor price shifts, which unleashed powerful and ubiquitous distributional forces around the world economy, principally by raising the relative price of land. 2 Williamson reported wage land rental ratios for a variety of countries which show falls in the ratio for land-abundant countries of the periphery, and rises both in land scarce Europe and in some land scarce Asian economies. In the extreme cases wage rentals were forty and eleven times higher respectively in Siam and Uruguay in 1870/4 than in 1911, but in western Europe, and in some land scarce east Asian economies, including Japan and Taiwan, wage rentals rose. The impact on income distribution, especially in parts of the less industrialised world may have been enormous. Shifts in real wages were, on Williamson s interpretation, powerfully influenced by the income distributional effects of movements in the wage rental ratio in land-abundant economies. Thus, the global trade booms of the late nineteenth century may have been accompanied by substantial income distributional effects. There appears little doubt that trade, and also the migration of capital and labour, by affecting relative factor prices, had potentially important consequences for income distribution around the world economy in the period between 1870 and In the case of less industrial economies, the distributional effects of globalisation were most powerful in land-abundant countries of the periphery rather than in the western offshoots where capital imports and capital deepening along with technological progress may have ameliorated the declines in the wage rental ratio. Distributional shifts in the western offshoots were less pronounced, particularly in North America, and indeed wage rentals rose in Canada, according to Williamson s data. Conversely, Williamson shows that changes in the relative price of agricultural goods impacted most strongly on land prices in the land-abundant regions where agriculture was a larger share of economic activity. In particular, in Uruguay, Argentina, Thailand, Egypt, and to a lesser extent in the Punjab, wage income fell relatively sharply. Elsewhere, in Europe and in land-scarce East Asia ( Japan, Korea, and Taiwan) the wage rental ratio rose. Relative factor price shifts, however, were less pronounced in the labour abundant economies of Williamson s sample. Labour gained most in Scandinavian countries. In Sweden and Denmark, the wage rental ratio doubled between 1870 and Williamson, Land, Labor, p. 81, see also O Rourke, Taylor, and Williamson, Factor price convergence and O Rourke and Williamson, Globalization and History.

3 Factor prices and income distribution in less industrialised economies Of course Williamson was acutely aware that his key facts surrounding relative factor prices and thus the distributional effects of globalisation are based on a small sample of countries, and accordingly he called for more research. The papers in this issue are a response, and they form part of a wider group of papers which were presented at the 2006 Helsinki Congress of the International Economic History Association. These papers report new data for factor prices (in several cases for both land and labour, but simply for labour in others) for a variety of countries, including Australia, Canada, New Zealand, Uruguay, India, Brazil, Sweden, Denmark, Ghana, and for various East Asian and European cities. 3 The detailed investigations of particular countries offered by this new research provide both support and some challenges for Williamson s general observations. In the cases of Australia and Canada, the importance of regional variation in relative factor prices is highlighted in the papers by Shanahan and Wilson, and by Emery, Inwood, and Thille. For Australia, Shanahan and Wilson stress the divergent wage rental shifts in South Australia compared with the other colonies. Wage rentals rose in South Australia to the early 1880s, and the ratio was roughly constant in the half century to World War I. Seemingly the distributional forces unleashed by global trade were not ubiquitous in land-abundant countries, and Shanahan and Wilson attribute relatively slow land price growth to both technological and policy forces that stimulated unusually rapid expansion of South Australia s farm frontier. Rather differently, Emery, Inwood, and Thille consider the puzzling characteristics of Canadian factor price history and they provide explanation of the rise in wage rental in land-abundant Canada shown by Williamson s data. In effect Emery, Inwood, and Thille argue that Canada was a microcosm of the Atlantic economy, in which relatively land scarce eastern Canada experienced outmigration and land-abundant western Canada in-migration; concomitantly wage rentals rose in the east and fell in the west. Emery, Inwood, and Thille s findings support Williamson s factor market and factor prices hypotheses, but they also highlight that national economies are not always the appropriate unit for analysis. Their perspective may also shed light on other land-abundant countries, including on the USA, where falls in wage rentals were comparatively modest according to Williamson s evidence. Bohlin and Larsson report new evidence for Swedish land prices using information on private sales, which shows faster growth than the public land sales data deployed by Williamson. Accordingly Bohlin and Larsson argue that Swedish wage rentals rose less quickly and at a similar pace to other protectionist European economies. Furthermore, they show that more powerful distributional shifts in favour of labour occurred during World War I and its aftermath when pay bargaining conditions advantaged workers. Wage rentals did rise rather faster in Denmark than in Sweden, but a strong distributional shift in favour of Danish wages in an era of trade union militancy in the aftermath of World War I was 3 The papers of session 62 may be found at

4 4 David Greasley, Kris Inwood and John Singleton also found by Greasley and Madsen. 4 Indeed, in the course of a comparison of Danish and New Zealand wages they argue that the effects of open economy forces on relative real wages in these two peripheral economies was modest compared with the effects of World War I and limited to the impact of capital flows, which especially benefited Danish wages. In contrast, land prices rose sharply in New Zealand in the years around World War I. Among Williamson s sample of land-abundant non-developed economies, India or more specifically the Punjab experienced the least fall in wage rentals to 1914, although the ratio did fall by around 50 per cent. Wage rentals in Punjab, however, continued to fall after World War I. In his paper, Roy takes issue with the view that the roots of poverty in India lie in global trade. For India, generally, export to gross domestic product ratios at around four to five per cent between 1870 and 1909 were low compared with the settler economies of the Americas and Australasia. 5 Roy argues that the stagnation in rural wages and rise in poverty must be explained with reference to factors internal to the rural economy, in particular to production conditions in agriculture, which moved from land-surplus to land-shortage with more or less unchanging land-yield. For Roy the critical problem was the stagnation in yield. He proposes that the roots of present-day poverty in India cannot be found in colonial trade, but in the absence of an agrarian revolution in the region until the last quarter of the twentieth century. Sub-Saharan African countries are absent from Williamson s sample. 6 In pioneering work Austin begins to remedy this deficiency by considering the case of Ghana. He argues that there was a lowering of the cost of labour in relation to that of land in Ghana within the late nineteenth and early twentieth century, but that in the West African context the change was more fundamental, in the sense of being institutional rather than simply quantitative. Specifically, slavery and debt bondage were replaced by wage labour and the mortgaging or pledging of land, while in some parts of the country a factor market in land materialised for the first time. Austin reports that the transition from slave to free labour meant that labourers gained in absolute terms even while the free-market bargaining power of land-owners increased. The papers in this issue add to our understanding of how global trade expansion and commodity market integration influenced income distribution among less industrialised countries between 1870 and Of course much more needs to be done, especially for Asian economies before we will be able to judge the ubiquity of the distributional forces unleashed by the late nineteenth century commodity export booms. The papers in this volume highlight the need for caution when attributing causes of distributional changes. This may especially be so for the South and Southeast Asian economies where stagnant farm productivity may, as Roy argues, have had important distributional effects. In innovative work 4 Greasley and Madsen, A tale of two peripheries. 5 Williamson, Globalization, p There is a paucity of data for these countries. Mosley, The Settler Economies: presents some data for African wages and European areas land prices.

5 Factor prices and income distribution in less industrialised economies Austin also shows that more African economies can and should be included in the debates. He highlights the profound institutional consequences of the rise of global trade in the case of Ghana, where free labour markets developed and wages rose. Nor did the land booms in western Canada preclude rapid wage growth in the Dominion generally. In other western offshoots, New Zealand, for example, shifts to more equitable land distribution helped offset the effects of falling wage rentals to Moreover, Shanahan and Wilson show wage rentals did not deteriorate in South Australia, and point to the impact of technological progress. For the European economies, for example, Sweden and Denmark, wage bargaining conditions and the power of organised labour appears to have eventually had important distributional effects, as shown by Bohlin and Larsson. Almost self-evidently, the global trade expansions of the late nineteenth century were not the only forces shaping income distribution among the less industrialised economies. Equally certainly, there is much validity in Williamson s general observations that commodity price convergence happened, that the terms of trade rose most strongly for the land-abundant economies of the periphery, and that concomitantly wage rentals tended to fall in land-abundant economies to 1914, but to rise elsewhere. Globalisation did powerfully affect income distribution. The papers here show that the effects may not have been ubiquitous, and that other distributional forces were at work. We suspect that Williamson might agree, and we are certain that he would encourage further research to further extend the evidence surrounding the globalisation and income distribution debates. REFERENCES Greasley, D., and Madsen, J. B. (2006) A tale of two peripheries: real wages and Denmark and New Zealand Scandinavian Economic History Review, 54, Greasley, D., and Oxley, L. (2004) Globalization and real wages in New Zealand Explorations in Economic History, 41, Greasley, D., and Oxley, L. (2005) Refrigeration and distribution: New Zealand land prices and real wages. Australian Economic History Review, 45, Mosley, P. (1983) The Settler Economies: Studies in the Economic History of Kenya and Southern Rhodesia (Cambridge: Cambridge University Press). O Rourke, K. H., and Williamson, J. G. (1999). Globalization and History: the Evolution of a Late Nineteenth Century Atlantic Economy (Cambridge, MA: MIT Press). O Rourke, K. H., Taylor, A., and Williamson, J. G. (1996) Factor price convergence in the late nineteenth century. International Economic Review, 37, Williamson, J. G. (2002) Land, labor and globalization in the Third World, Journal of Economic History, 62, Williamson, J. G. (2006) Globalization and the Poor Periphery Before 1950 (Cambridge, MA: MIT Press). 7 Greasley and Oxley, Refrigeration and Distribution; Greasley and Oxley, Globalization and Real Wages.