Abstract

W. Arthur Lewis argued that a new international economic order emerged between 1870 and 1913, and that global terms of trade forces produced rising primary product specialization and de-industrialization in the poor periphery. More recently, modern economists argue that volatility reduces growth in the poor periphery. This article assesses these de-industrialization and volatility forces between 1782 and 1913 during the Great Divergence. First, it argues that the new economic order had been firmly established by 1870, and that the transition took place in the century before, not after. Second, evidence from 1870–1939 confirms that while terms of trade improvements raised long-run growth in the rich core, they did not do so in the poor periphery. Given that the secular terms of trade boom, and thus de-industrialization, was much bigger in the poor periphery before 1870 than after, one might plausibly infer that it might help explain the Great Divergence. Third, growth-reducing terms of trade volatility also contributed to the Great Divergence. Terms of trade volatility was much greater in the poor periphery than the core before 1870. It was still very big after 1870, certainly far bigger than in the core. Based on evidence drawn from 1870–2000, we know that such volatility lowers long-run growth in the poor periphery, and that the negative impact is big. Since terms of trade volatility in the poor periphery was even bigger before 1870, one might plausibly infer that it also helps explain the Great Divergence before 1870.

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