What You Exported Matters: Persistence in Productive Capabilities across Two Eras of Globalization

Isabella Weber, Tom Westland and Maya McCollum

“The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep…”

This was how John Maynard Keynes described the globalisation of the Belle Epoque before the First World War. London, and by extension Britain, was at the centre of the world economy: not just a global manufacturing powerhouse, but also the ruler of a vast colonial domain upon which the sun famously never set.

The global division of labour was stark: Britain and other Western nations largely produced manufactured goods. But they also exported a whole range of temperate agricultural goods like wheat, beef and barley. Elsewhere in the European colonial empires, products like cotton, cocoa and coffee were exported, often at very low prices and sometimes with forced labour, to sate a growing demand in the global economic core for tropical luxuries.

More than a century has passed since World War I heralded the collapse of this world order. Today, another globalization wave that has shaped the world since the 1980s is ebbing.

The question we ask in our Rebuilding Macroeconomics project is simple: what is the legacy of the First Globalization of the late nineteenth and early twentieth centuries on the economic fortunes of countries during the Second Globalization? Or in other words, to what extent have countries’ positions in the international economic order been persistent across the two globalizations with some trapped at the bottom and others floating on top?

To answer this question, we have assembled a large new database of global commodity exports from 1897-1906. We exploit the fact that this period was the high point of colonial trade statistics and use a large variety of primary sources in five languages. To the best of our knowledge, ours is the most ambitious census of world trade for the previous globalization to date. This allows us to investigate the long-term wealth of nations in ways that aren’t possible with GDP data. The latter is sparse and unreliable for large parts of the world before the Second World War.

What countries export matters for their prosperity. This is a long-standing insight in development economics. We use export diversification, economic complexity, and export sophistication, as well as the manufacturing share of exports as key indicators of countries’ position on the global development ladder. We have converted our historical data into the Standard International Trade Classification. This allows us to measure these indicators in a consistent fashion across a century.

The four measures are highly, but not perfectly correlated with one another. Building on complexity economics and recombinant growth theory we argue that this is because each measure reflects a dimension of the underlying productive capacity of an economy.

Figure 1 maps global export diversification across the two globalizations. Overall, the maps point to persistence. The continued dominance of Europe and North America after decades of deindustrialization catches the eye. China and India are still surprisingly diversified at the turn of the 20th century, despite a long period of decline in native industries at this point. From the vantage point of our comparison, the recent rise of Asia appears as a re-emergence for some key countries. Africa is largely trapped at the bottom of the diversification hierarchy and several countries are ranking even lower today than at the time of colonial domination. There are some hopeful cases of catching up in Latin America. Eastern European and Middle Eastern countries have mostly fallen behind.

Figure 1: World Map of Export Diversification in 1897:1906 and 1998:2007

Source: Weber, Semieniuk, Westland and Liang (2021)

Figure 2 plots economic complexity across the two globalizations. It leaves little doubt about persistence: the higher a countries’ economic complexity a century ago, the higher it is today. We find that same strong and positive relation for our other proxies of productive capabilities. The great impact of history on today’s productive capabilities is statistically significant, quantitatively large and robust to controlling for variables usually considered as important drivers of growth and export diversification such as economic liberalization, human capital, and the quality of institutions. We also demonstrate that our results are not driven by persistence in geography or institutions.

Figure 2: Economic Complexity 1897-1906 versus 1998-2007

Source: Weber, Semieniuk, Westland and Liang (2021)

Not only are productive capabilities highly persistent but countries’ export baskets under the previous globalization predict more than half of the variance of today’s real GDP per capita. What you exported matters for where you are on the development ladder today. There are two significant and robust exceptions to the persistence in productive capabilities: First, former European overseas colonies ranked low then, but have fallen even further behind in the current period. Second, countries that have discovered oil show downward path-defiance. This confirms the resource curse hypothesis. Finally, democratization appears to have a mildly positive effect which, however, takes several decades to unfold fully.

Do our findings suggest that there is no escape from history? No. While the effect of past performance is very large and robust, history only explains part of the variance. There is scope for change. In our future research we plan to examine the trajectories of countries that have managed to catch-up as well as those that have fallen behind to further our understanding of the factors that undermine the strong general trend of persistence.