Trade and Poverty: When the Third World Fell Behind (review)

This book contains some simple and powerful ideas and tells a simple and schematic story. Jeffrey Williamson’s theme is shifts in the terms of trade and their effects on “the divergence between western Europe and the rest” (3). His temporal focus is the nineteenth century, and his spatial focus is the world. Productivity gains in manufacturing (the British industrial revolution) caused a historic fall in the prices of the manufactured goods relative to agricultural goods after the late eighteenth century. This effect was intensified by the conjoint revolution in transportation, which drastically reduced the cost of shipping bulk goods, and by the adoption of liberal trade policies. The result was a historic shift in the terms of trade, as the prices of agricultural and other raw materials increased relative to the price of the manufactures, fostering a historic trade boom between the new manufacturing core and the “poor periphery” of commodity producers. This “terms of trade boom” ended for most commodity-producing countries, depending on the commodities involved, in the 1860–1890s. It was a “magnificent gift” of cheaper manufactured goods from England to the poor periphery (32). But beware of such gifts! The trade boom encouraged countries to specialize in commodity exports and had negative side effects: deindustrialization; increased social inequality; rent-seeking by elites; and resulting political distortions. Although growth and gains of trade at the level of whole national economies continued everywhere, growth was much faster in the core manufacturing countries. Thus, “the third world fell behind.” This gap was worsened in the next historical phase, by the great depression in the terms of trade for commodity producers, which began in the late nineteenth century and intensified after World War I. Reindustrialization also began in many countries at this time. The task of the poor periphery now is to industrialize (or reindustrialize); in fact, this is happening across many regions that formerly specialized in commodity exports.

This theoretical narrative deserves serious thought. To my eyes, the data Williamson offer also tell a different story concerning some of its pivotal junctures.

First, when Williamson aggregates the whole “poor periphery” (but excluding China [too different] and Africa [insufficient studies]), terms of trade in the nineteenth century indeed showed an overall rise, to a final peak in the early 1890s (Figure 3-2). But a closer look reveals a distinct stair-step profile: almost all of this increase came in two concentrated surges, the first around 1815–1824, the second around 1867–1874. There was a forty-year plateau in between. Terms of trade for commodity producers fell back after 1877, staged a final rally at the end of the 1880s, and then collapsed in the 1890s, reversing all of the increase since the 1860s. (Williamson present the data here as graphs; one has to dig elsewhere for the numbers.)

This picture is very interesting because of something Williamson does not bring into analysis: the two great surges in commodity-producer terms of trade were precisely the moments of the first great booms in core-country lending to “third world” countries. These brief booms ended in the first great Third World Debt Crises, which broke in 1825 and in 1874–1875 (Christian Suter, Debt Cycles in the World Economy, 1992). Another international lending boomlet came in the late 1880s, and another bust followed. Williamson’s aggregated story thus finds some remarkable confirmation.

On the other hand, aggregation has its problems. Williamson leaves China out—as he says, China’s historic profile is so different and its demographic weight is so great that to have included it would have drowned out the whole story presented. China was different (in line with its labor-intensive development path as sketched by Kaoru Sugihara) and it may be legitimate to exclude it. I have already offered one reason for thinking that Williamson’s aggregated picture means something. China raises other doubts though. The one great terms-of-trade...