Globalization and the Great Divergence: Terms of Trade Booms and Volatility in the Poor Periphery 1782-1913

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-industrializationin the poor periphery. More recently, modern economists argue that volatility reduces growth in thepoor periphery. This paper assess these de-industrialization and volatility forces between 1782 and1913 during the Great Divergence. First, it argues that the new economic order had been firmly establishedby 1870, and that the transition took place in the century before, not after. Second, based on econometricevidence from 1870-1939, we know that while a terms of trade improvement raised long run growthin the rich core, it did not do so in the poor periphery. Given that the secular terms of trade boom inthe poor periphery was much bigger over the century before 1870 than after, it seems plausible to inferthat it might help explain the great 19th century divergence between core and periphery. Third, theboom and its de-industrialization impact was only part of the story; growth-reducing terms of tradevolatility was the other. Between 1820 and 1870, terms of trade volatility was much greater in thepoor periphery than the core. It was still very big after 1870, certainly far bigger than in the core. Basedon econometric evidence from 1870-2000, we know that terms of trade volatility lowers long run growthin the poor periphery, and that the negative impact is big. Given that terms of trade volatility in thepoor periphery was even bigger during the century before 1870, it seems plausible to infer that it alsohelps explain the great 19th century divergence between core and periphery.