The Impact of the Terms of Trade on Economic Development in the Periphery, 1870-1939: Volatility and Secular Change

Abstract

Most countries in the periphery specialized in the export of just a handful of primary products for most of their history. Some of these commodities have been more volatile than others, and those with more volatile prices have grown slowly relative both to the industrial leaders and to other primary product exporters. This fact helps explain the growth puzzle noted by Easterly, Kremer, Pritchett and Summers more than a decade ago: that the contending fundamental determinants of growth-institutions, geography and culture-exhibit far more persistence than do the growth rates they are supposed to explain. Using a new panel database for 35 countries, this paper estimates the impact of terms of trade volatility and secular change on country performance between 1870 and 1939. Volatility was much more important for accumulation and growth than was secular change. Additionally, both effects were asymmetric between Core and Periphery, findings that speak directly to the terms of trade debates that have raged since Prebisch and Singer wrote more than 50 years ago. The paper also investigates one channel of impact, and finds that foreign capital inflows declined steeply where commodity prices were volatile.

Uruguay and the First Globalization: On the Accuracy of Export Performance, 1870-1913

“…The evolution of our index resembles that one of Blattman et al (2004) and agrees with what literature on the topic says about the evolution of international prices during this period. That is, international prices of primary commodities decreased until the 1890s and recovered onwards.…”

“…We compare our XPI with other export price indexes for Uruguay available in the literature, one from Blattman et al (2004) and two others from . To make this comparison possible we change the base period of our index to 1913.…”

Globalization, de-industrialization and underdevelopment in the third world before the modern era

“…There are a few more missing observations from the interwar core, leaving 79 observations instead of the 84 (=14x6) that would be available in a complete dataset. The full data base is described in Blattman, Hwang, and Williamson (2004). from 1920 to 1939-exhibit the same behavior 10 .…”

“…There are 35 countries in the historical sample that Chris Blattman, Jason Hwang and I (Blattman, Hwang and Williamson 2004) used recently to explore these issues: 14 in the core and 21 in the periphery, although the results are robust to every plausible core-periphery allocation explored 9 . Table 1 lists the 35 countries by GDP per capita, the dominance of primary products in exports, export concentration and export shares in GDP.…”

“…As we suggested above, it seems likely that the key channel of impact was through suppressed accumulation rates. Indeed, when one channel of terms of trade impact is investigated -the flow of investment funds from Britain-it appears that capital inflows 1870-1939 were negatively influenced by terms of trade volatility in the periphery, but not in the core (Blattman, Hwang and Williamson 2004).…”