Globalization in Historical Perspective

The University of Chicago Press

Copyright © 2003 National Bureau of Economic Research
All right reserved.

ISBN: 978-0-226-06600-4

Chapter One

Commodity Market Integration, 1500-2000

Ronald Findlay and kevin H O'Rourke

1.1 Introduction

This paper provides an introduction to what is known about trends in international commodity market integration during the second half of the second millennium. Throughout, our focus is on intercontinental trade, since it is the emergence of large-scale trade between the continents that has especially distinguished the centuries following the voyages of da Gama and Columbus. This is by no means to imply that intra-European or intra-Asian trade was in any sense less significant; it is simply a consequence of the limitations of space.

How should we measure integration? Traditional historians and modern trade economists tend to focus on the volume of trade, documenting the growth of trade along particular routes or in particular commodities, or trends in total trade, or the ratio of trade to output. While such data are informative, and while we cite such data in this paper, ideally we would like to have data on the prices of identical commodities in separate markets. Commodity market integration implies that these prices should be converging over time; such price convergence will, other things being equal, drive up the volume of trade. However, the volume of trade could also increase for reasons unconnected with integration, or decline for reasons unconnected with disintegration: Shifts in supply and demand will also lead to changes in trade flows, and these have no necessary connection with "globalization."

Price convergence is thus the best measure of commodity market integration. Price gaps will reflect all relevant costs of doing trade between markets: not just transport costs, but also trade barriers, and those costs associated with wars, monopolies, pirates, and so on. For the nineteenth and twentieth centuries trade barriers and transport costs were the most important barriers to trade, and we have fairly detailed accounts of what happened to these, which we provide below. For earlier centuries, we have only limited information on these costs, as well on price gaps between markets; in addition, during the mercantilist era price gaps were as likely to be due to trade monopolies, pirates, and wars as to transport costs and tariffs, which are more easily quantifiable. Thus, for the earlier period we rely more on qualitative information regarding trade routes, and quantitative information regarding the volumes of commodities actually traded; for the later period we are able to switch to more systematic price-based evidence. We begin, however, with a brief description of the preconditions underlying the Voyages of Discovery.

1.2 World Trade before 1500

Although it has become conventional to see the formation of the world economy as following in the aftermath of the European Voyages of Discovery in the late fifteenth century, this should not be taken to imply that there was no relevant previous history. Columbus and da Gama were both motivated to break the monopoly of the spice trade held by the rulers of Egypt and the Italian city-states, particularly Venice and Genoa. Thus we need to have some understanding of the structure and volume of this trade, at the very least. Both China and India, with their large populations relative to Europe, traded with Southeast Asia; and both engaged in the overland trade with Eastern Europe, the Islamic world, and the Mediterranean. The Baltic trade was also of significance to both Northern and Eastern Europe. Shipping and nautical technology generally had also emerged through a complex interplay of several civilizations and economic systems.

There is also the question of incentives and capabilities in the determination of "who discovered whom?" It was once natural to assume that the Europeans were first across the seas because they were the first with the necessary technology. This comfortable Eurocentric assumption is belied by the voyages of the Ming admiral Zheng He in the first three decades of the fifteenth century. This shifts the question from technological capability to economic incentive. Findlay (1996), following Abu-Lughod (1989) and others, provides an outline of a complex pattern of linkages among wool from England and Spain, woolen cloth from Flanders and Italy, furs from Eastern Europe, gold from West Africa, cotton textiles and pepper from India, fine spices such as cloves and nutmeg from Southeast Asia, and silk and porcelain from China that existed from at least a thousand years ago. The Islamic world, stretching from the Atlantic to the Himalayas, and Sung China were the most advanced economic systems of that era with large cities, considerable manufacturing production, and sophisticated monetary and credit systems. Western Europe, except for the Italian cities and Flanders, was a relatively backward agricultural area.

Despite the destruction unleashed during the process of its creation, the establishment of the Mongol Empire in the thirteenth century led to a unification of the Eurasian continent as a result of the "Pax Mongolica" across Central Asia. As Needham (1954) and others have argued, perhaps without sufficient specificity, the Pax Mongolica led to a significant transmission of ideas and techniques, along with an increased volume of goods and people. In addition, however, there was also the transmission of the deadly plague germs that resulted in the demographic catastrophe of the Black Death in the 1340s: This reduced the population of Europe and the Middle East by about a third. The reduced volume of production and trade led economic historians to speak of the centuries of the Renaissance in Europe as a time of economic depression. As several authors have pointed out, however, the plague raised per capita wealth, incomes, and wage-rates, replacing a large but relatively stagnant European economy in 1340 that was already at its Malthusian limits with one that had two-thirds of the population but the same amount of land, capital, and stock of precious metals in coins and bullion. The economic and monetary consequences of the Black Death are worked out by means of a general equilibrium model with endogenous population, capital, and commodity money supply in Findlay and Lundahl (2000). Real wages rise; population slowly recovers, driving real wages slowly down again; and an initial inflationary spike is followed by a long phase of deflation. The model postulates a demand for Eastern luxuries that rises with the higher per capita wealth and income, leading to an increased outflow of precious metals to the East and hence a prolonged monetary contraction. Thus what Day (1978) called the "Great Bullion Famine of the Fifteenth Century" can be explained as a consequence of the Black Death in the previous century. Eventually the model predicts a return to the initial long-run stationary equilibrium that prevailed before the onset of the Black Death, if all underlying behavioral relationships remain unchanged.

As Herlihy (1997) argues, however, the drastically altered circumstances of people's lives would prompt alternatives in attitudes and institutions. The greater scarcity of labor would tend to dissolve feudal ties and stimulate labor-saving innovations, the higher per capita incomes could lead to postponement of the age at marriage in an effort to maintain the higher income levels, and so on. Furthermore, this period of increased incomes and a higher demand for Asian luxury goods coincided with the demise of the Pax Mongolica and its associated overland trade, and a consequent reliance (once more) on traditional Indian Ocean trade routes and monopolistic Egyptian and Venetian intermediaries. Presumably this increased the incentive to find a sea route to Asia. The result of all these changed incentives could well be a more modern society in 1450 than in 1350, one that was ready to venture more readily and further abroad and so usher in a true era of globalization with the Voyages of Discovery linking all the continents by sea.

1.3 World Trade 1500-1780

1.3.1 Introduction

This period opens with the European Voyages of Discovery across the Atlantic and around the Cape of Good Hope to the eastern seas, shortly followed by the crossing of the Pacific and the circumnavigation of the globe. The "globalization" of the world economy in the sense of the linking of markets in the Old and New Worlds that had hitherto been separated thus begins in this period, even if we have to wait until later for evidence of a "big bang" in terms of convergence in world product and factor prices. Thus Flynn and Giraldez (1995) are not necessarily only tongue in cheek when they date the "origin of world trade" to the year 1571 when the city of Manila was founded, directly linking the trade of Europe, Asia, Africa, and the Americas. However, with transport costs still high relative to production costs, long-distance trade was largely confined to commodities with a high ratio of value to weight and bulk, such as spices, silk, silver, and, last but not least, slaves. Nevertheless, the channels were laid along which the volume of world trade could grow later under the influence of technological change, capital accumulation, and population growth.

The most momentous immediate consequence of the discoveries was the injection of large amounts of silver into the circuits of world trade, with the influx into Europe in particular leading to the so-called "price revolution of the sixteenth century." Within Europe the period was marked also by shifts in the locus of what Kindleberger (1996) calls "economic primacy." The Iberian voyages led to a shift away from the earlier commercial dominance of Venice and the Italian cities, since the Cape route broke the monopoly shared by Venice and the rulers of Egypt on the spice trade through the Red Sea. The Portuguese were soon displaced, however, by the rising power of the Dutch, with Amsterdam, the "Venice of the North," displacing the original one and its successor Antwerp. There followed the long struggle between the Dutch and the English East India companies, the "multinational corporations" of that area.

Despite the prominence of European explorers, conquistadors, and merchants during the earlier part of this period it is a profound historical mistake to imagine European dominance of the global economy as dating from soon after the original voyages. Ironically, the phrase "Vasco da Gama Epoch" was coined not by a European but by the nationalist Indian diplomat and historian K. M. Panikkar (1953). We must not forget that Constantinople fell to the Ottoman Turks shortly before da Gama was born and that the Safavids and Mughals established their rule in Persia and India before his death, in the first case, and shortly after it, in the second. All three of these formidable "gunpowder empires" were involved in the network of world trade despite being essentially territorial powers, with dependence on imports of silver for their coinage being the most important link. Access to firearms and opportunities for greater revenue through taxing trade were also an important factor in strengthening native kingdoms throughout Southeast Asia and Japan. In the case of Ming China the introduction of the sweet potato, peanuts, and other New World crops led to a substantial increase in agricultural productivity, stimulating population growth and the demand for imported silver and leading in turn to the export of tea, porcelain, and silk (Ho 1959).

1.3.2 Trade after the Voyages of Discovery: Qualitative Trends

One way of thinking about the qualitative evolution of world trade over time is given in Mauro (1961), who presents an intriguing intercontinental matrix for world trade during this period, with the Americas separated into tropical and temperate zones. The Voyages of Discovery, as well as those of Captain Cook, led to the emergence of trade flows between continents where previously there had been none; thus cells in the matrix which had been empty were no longer so. Second, once this had happened the range of goods being traded between continents began to expand, in response to declining transport costs, or shifts in demand and supply in the various regions of the world. The period from 1500 to 1780 was marked by a gradual evolution in the type of goods being traded. Originally the goods concerned were for the most part noncompeting, in the sense that the trade was driven by the availability of commodities in some continents but not in others. Thus, Asia exported spices and silk, while the Americas exported silver. These goods had an extremely high value-to-bulk ratio, the high prices being due to the absence of local substitutes in destination markets. As the period progressed, bulkier commodities began to be shipped. Typically, these commodities (e.g., sugar and raw cotton) were still produced only in particular continents and faced rather imperfect substitutes in destination markets (e.g., honey and wool). The great counterexample was India's exports of cotton textiles, which accounted for more than half of the East India Company's exports to Europe in the 1750s (table 1.1). However, it was really only after the transport revolutions of the nineteenth century that intercontinental trade began in homogeneous bulk commodities, such as wheat, iron, and steel, that could be produced anywhere.

The discovery of the Cape route had an almost immediate impact on Venetian imports of pepper and spices, but the effect was short-lived. Wake (1979, 373) reports that pepper imports declined by 85 percent in 1501 over the average of the 1490s and spices by 42 percent. Portuguese imports supplied half the European market in 1503-06 and much more a decade later (Wake, 381). However, the Portuguese never succeeded in their ambition to monopolize the pepper and spice trade. As the sixteenth century progressed the Venetians and the overland trade fought back: In 1560 Venice imported 2,000 tons of pepper, more than it had imported in 1496 (Bulbeck et al. 1998, table 3.2, 72-73). Nor did the voyages of discovery lead to an immediate collapse in European pepper prices: Instead, figure 1.1 shows real pepper prices initially rising sharply, as the Portuguese disrupted traditional trade routes, and then rising for a second time in midcentury. They then started to decline, especially during the seventeenth century, which saw the Portuguese displaced by the Dutch and English East India Companies. Imports into Europe increased substantially and prices fell to 30-40 percent below the prices maintained by the Portuguese in the previous century (Wake, 389). Although Venice had successfully competed with the Portuguese during the sixteenth century it could not survive the Anglo-Dutch competition in the first half of the seventeenth century. The annual consumption of pepper in Europe increased from about 3.4 million pounds in 1611 to 8.6 million in 1688, of which the Dutch supplied 4.00 and the English 3.24 million (Wake, p. 391).

Pepper production and exports from Southeast Asia rose in response to the increased demand not only from Europe but also from China. Bulbeck et al. (1998, table 3.7) indicate total exports from Southeast Asia increasing by a factor of 3.4 from the beginning to the end of the sixteenth century, by a further 50 percent to the end of the seventeenth century, and by 20 percent more to the end of the eighteenth century-about sixfold from 1500-1800. The table also shows that the shares of Europe, China, and "Other Regions" in total exports were stable at roughly one-third each over the entire period, despite considerable fluctuations between decades. Chinese emigrants from the southern provinces engaged in a vigorous expansion of cultivation in Southeast Asia during the eighteenth century, using innovative labor-intensive methods that raised yields per acre substantially. (Continues...)

Excerpted from Globalization in Historical Perspective Copyright © 2003 by National Bureau of Economic Research. Excerpted by permission.