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Globalizationand
Inequality,
and
Present
Past
JeffreyG. Williamson
Thelate nineteenthand late twentiethcenturiessharedmorethanglobalization
Thetrendtowardglobalizationin bothcenturieswas
and economicconvergence.
accompaniedby changesin the distributionof incomeas inequalityrosein rich
countriesandfell in poor ones.Betweenone-thirdand one-halfof the risein inequalitysincethe 1970s in the UnitedStatesand othermembercountriesof the
and Development(oEcD)hasbeenattribOrganizationofEconomicCooperation
utedtoglobaleconomic
forces,aboutthesameas a centuryearlier.It appearsthat
theinequalityproducedbyglobaleconomic
forcesbeforeWorldWarI wasresponsiblein partfor the retreatfrom
globalizationafterthe war. Whatdoesthisretreat
Willtheworldeconomyonceagainretreatfrom
implyforthefiuture?
globalization
to cushionthesideefectsof
as therichOECDcountriescomeunderpoliticalpressure
risinginequality?
Economicgrowthafter1850 in the countriesthatnow belongto the Organization for EconomicCooperationand Development(OECD) can be dividedinto
threeperiods:the late nineteenthcenturybelle epoque,the darkmiddleyears
between 1914 and 1950, and the late twentiethcenturyrenaissance.The first
and last epochswere characterized
by rapidgrowth;economicconvergenceas
poor countriescaught up with rich ones; and globalization,markedby trade
booms,massmigrations,and huge capitalflows.The yearsfrom 1914 to 1950
are associatedwith slow growth, a retreatfrom globalization,and economic
divergence.Thus historyoffersan unambiguouspositivecorrelationbetween
globalizationand convergence.When the pre-WorldWarI yearsareexamined
in detail, the correlationturns out to be causal:globalizationwas the critical
factorpromotingeconomicconvergence(Williamson1996a).
Because contemporaryeconomists are now debating the impact of the
forcesof globalizationon wage inequalityin the OECD countries,the newly
liberalizedLatinAmericanregimes,and the EastAsian "tigers,"it is time to
The WorldBankResearchObserver,vol. 12, no. 2 (August1997), pp. 117-35
C 1997 The InternationalBank for Reconstructionand Development/ THE WORLD BANK
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1 17
ask whether the same distributional forces were at work during the late
nineteenth century. A body of literaturealmost a century old arguesthat
immigration hurt American labor and accounted for much of the rise in
income inequalityfrom the 1890s to World War I. The decision by a laborsympathetic Congress to enact immigration quotas shows how important
the issue was to the electorate.An even older literaturearguesthat cheap
grainexportedfrom the New World erodedland rentsin Europeso sharply
that landowner-dominatedcontinental parliamentsraisedtariffsto protect
domestic growers from the impact of globalization. But nowhere in this
historicalliteraturehad anyone constructeddata to test three contentious
hypotheseswith importantpolicy implications:
Hypothesis1: Inequalityrose in resource-rich,labor-scarcecountries
suchasArgentina,Australia,Canada,andthe UnitedStates.Inequality
fell in resource-poor,labor-abundantagrarianeconomies such as
Ireland,Italy,Portugal,Scandinavia,and Spain.Inequalitywas more
stableamongthe Europeanindustrialleaders,includingBritain,France,
Germany,and the Lowlandcountries,all of whom fell in betweenthe
richNew Worldand poor Old World.
Hypothesis2: If the first hypothesisis true, a second follows: these
inequalitypatternscan be explainedlargelyby globalization.
Hypothesis
3: If this secondhypothesisholds, then theseglobalizationinducedinequalitytrendshelp explainthe retreatfrom globalization
between 1913 and 1950.
This articlereviewsthe historicaldebateaboutthe firstglobalizationboom
in the late nineteenth century and attempts to tie it to the currentdebate
about the globalization boom in the late twentieth century. The two debates are strikinglysimilar.They also sharea shortcoming in the empirical
analysis:nobody has yet explored this issue with late nineteenth century
panel data acrosspoor and rich countries, and, with the important exception of Wood (1994), few have done so for the late twentieth century debate either (Burtless1995, p. 813). Indeed, until veryrecently,most economists had focused solely on the American experience. The central
contribution of this paper is to explore a databasefor the late nineteenth
century that includes both rich and poor countries or, in the modern vernacular,North and South.
It appearsthatglobalizationdid contributeto the implosion,deglobalization,
and autarkicpolicies that dominatedbetween 1913 and 1950. Indeed, during these yearsof tradesuppressionand binding migrationquotas, the connection betweenglobalizationand inequalitycompletelydisappeared.It took
the globalizationrenaissanceof the early 1970s to renewthis old debate.
1 13
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production.
Thusa tradeboominducedbya dropin tariffsor in transport
costswillcauseexports
andthedemand
forthecheapfactorto boomaswell.
Globalization
in poorcountries
shouldfavorunskilled
labor;globalization
in
richcountries
shouldfavorskilledlabor.Lawrence
andSlaughter
(1993)exploredthiswageinequality
andconcludedthattherewaslittleevidenceto sup-
portthestandard
trademodelexplanation.
theauthors
Instead,
concluded
that
technological
changewasanimportant
sourceof risingwageinequality.
Hot
debateensued,
withno resolution
in sight.
Thisstrandof thedebatestressed
theevolution
of labordemandby skill,
thepotential
ignoring
influence
ofsupply.Borjas
(1994)andBorjas,
Freeman,
andKatz(1992)tookadifferent
approach,
emphasizing
instead
howtradeand
immigration
augmented
thesupplyof laborin theUnitedStates.Theyfirst
estimated
theimplicitlaborsupplyembodied
in tradeflows,sinceimported
goodsincrease
theeffective
laborsupplyin theimporting
country.
Similarly,
exportsimplya decrease
in theeffectivelaborsupplyin theexporting
country.
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119
fairlymobileandthattechnology
is freelyavailable.
Astradebarriers
falland
the Southimprovesits skillsthroughtheexpansionof basiceducation,it pro-
ducesmoregoodsthatrequire
onlybasicskills,whiletheNorthproduces
more
high-skill
goods.It followsthattheratioof theunskilled
to theskilledwage
shouldriseintheSouthandfallintheNorth.Thetendency
toward
therelative
convergence
of factorpricesraisestherelative
wageof workers
witha basic
education
in theSouthandlowersit in theNorth,producing
risinginequality
in theNorthandfallinginequality
in theSouth.
Woodconcludes
thatthedeclinein therelative
wagesof less-skilled
northernworkers
is causedbytheelimination
of tradebarriers
andtheincreasing
abundance
of southern
workers
witha basiceducation.
Healsodismisses
skillusingtechnological
as
a
change potential
explanation
forrisinginequality
becauselaborandtotalfactorproductivity
growth
bothslowedduringtheperiod.
Woodalsoargues
thatthepattern
of increasing
wageinequality
in theNorth
favors
atradeexplanation
because
thereisnocross-country
association
between
inequality
trendsandtechnological
progress.
120
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SincehisbookapWood'sresearch
hasmetwithstiffcriticalresistance.'
and
aboutthelinkbetween
in 1994,morehasbeenlearned
inequality
peared
thatpoorcouncountries.
Economic
theoryargues
indeveloping
globalization
unlessdemoin thefaceofglobalization,
triesshouldbecomemoreegalitarian
forcesoffsetit.Arecentreview
revolution
orindustrial
byDavis(1996)
graphic
inLatinAmerica
andEast
anda studyof sevencountries
thecontrary,
reports
didnotfallaftertradeliberalization
typically
Asiashowsthatwageinequality
hasbeenstrengthened
rose(Robbins
anomaly
1996).Thisapparent
butrather
sinceWood'sbook
by otherstudies,someof whichhavebeenrediscovered
andChoksi1991).Almosttwentyyearsago
Papageorgiu,
appeared
(Michaely,
theperiodthrough
countries
covering
Krueger
(1978)studiedtendeveloping
ofstandard
not
to
the
were
favorable
her
and
simplepredictions
1972,
findings
havebeensupported
and
by Bourguignon
tradetheory.Herconclusions
liberalization
Morrisson
(1991)andbyrecentworkontheimpactof Mexican
andHanson1995;Feliciano
onwageinequality
1996).Noneofthese
(Feenstra
tothesimultaneous
roleofemigration
fromthesecounisveryattentive
studies
thedebatefarfromresolved.
tries,however,
leaving
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121
O Fullsample
O SampleexcludingNorthAmerica
3 |
A Sampleexcluding NorthAmerica,
Spain, and Portugal
2.5-
2-
1.5
0.5
?J .1
1854
__
1I
1899 1904
1909 1913
122
TheWorld
BankResearch
vol.12,no.2 (August
Observer,
1997)
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in Liverpoolwere 60 percenthigher than those in Chicago in 1870, for example,but theywerelessthan 15 percenthigherin 1912, a declineof forty-five
percentagepoints. The commodity price differentialdeclined by even more
when the spreadis measuredfromwheat-growingregionsoutsideof Chicago.
Furthermore,pricesof all tradables,not just grain,were affected.It shouldbe
stressedthat theseglobalizationpriceshockswerefar largerthan thoseembedded in the infamous1930 Smoot-Hawleytariffor any otherU.S. tariffin the
past century.3They were also largerthan the decline in OECD tariffbarriers
inducedby the GeneralAgreementon TariffsandTradeafterthe 1940s,events
which triggeredthe globalizationboom of the lastquartercentury.WorldBank
studiesreportthattariffson manufacturesimportedby industrialcountriesfell
from 40 percentin the late 1940s to 7 percentin the late 1970s, a drop of
thirty-threepercentagepoints. Wood (1994, p. 173) uses this exampleto advertisejust how revolutionaryworld commoditymarketintegrationhas been
in recentdecades,but even this spectaculardrop is smallerthan the forty-five
percentage-pointdeclinein tradebarriersbetween 1870 and 1913 causedby
improvementsin transport.
The standardtrademodel arguesthat, as countrieseverywhereexpandthe
productionand exportof goods that use their abundant(and cheap) factors
relativelyintensively,the resultantmarketintegrationwouldleadto an internationalconvergenceof factorprices.Underthis theory,then, the latenineteenth
centurytradeboom accountedfor 10 to 20 percentof the convergencein GDP
per workerhour and in the realwage.4It also had distributionalimplications
for poor countries:it meantrisingwagesfor unskilledworkersrelativeto land
rentsand skilledwages.For rich countries,it meant that unskilledwagesfell
relativeto land rentsand skilledwages.
MigrationIssues
The correlationbetweenrealwagesor GDPperworkerhourandmigrationrates
is positiveand highlysignificant.The poorestOld World countriestendedto
havethe highestemigrationrates,whilethe richestNew Worldcountriestended
to havethe highestimmigrationrates.The correlationis not perfectsince potential emigrantsfrom poor countriesoften found the cost of the move too
high, and some New World countriesrestrictedinflowsof such migrants.But
the correlationis still very strong. Furthermore,the effect on the laborforce
was veryimportant,augmentingthe New Worldlaborf6rceby almost37 percent and reducingthe Old Worldlaborforceby 18 percent(atleastamongthe
emigrantcountriesaroundthe Europeanperiphery),much largerthan U.S.
experiencein the 1980s. One estimatesuggeststhat mass migrationsexplain
about 70 percentof the realwage convergencein the late nineteenthcentury
Jeffey G. Williamson
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123
100)
New World
700
600
500
30 -
Argentina
Australia
Canada
USA
-tJ
200
ma
100
1870
1875
1880
1885
1895
1890
1900
1905
1910
1913
100-
80
/-
*i
40-
20.-
1870
1875
1880
1885
1890
1895
1900
1905
1910
Britain
Denmark
Ireland
Sweden
1913
120
60
0-
40
3
-
1870
1875
1880
1885
1890
1895
1900
1905
1910
France
Germany
Spain
(1907=
100)
1913
124
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125
GDP
.,J
~~~~~~~~~~~~~~Australia
140
-, *.
Belgium
Canada
Denmark
France
Germany
Italy
* ~Netherlands
1O()l
t-S_;
- -
8080
_ ,_
_, _
_,
_
________*__
60
40 4C
._________________________________________________
-,
,-
_Noray
--*-~~~~~~~~~~~~~~~
Q~1Spaint
--g- Sweden
iUnited Kingdom
* United States
1870
1890
1913
Note: Inequality levels are normalized by setting the ratio of unskilled wages to GDP per workerhour at 1870 = 100.
Source: Williamson (1996b).
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Belgium
Portugal
A -
-0.5
Netherlands
France % Germany
-1 A
Canada
UnitedKingdom
Spain
U
Australia
UnitedStates
Rising
inequality
-1.5
10
30
50
70
90
110
130
JeffreyG. Williamson
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127
to scarce
factors
(suchasland)relative
shouldraisethereturns
mesticindustry
Inthefaceofglobalization
forces,
factors
labor).
(suchasunskilled
toabundant
of unscarcity
shouldatleastmutetherisein therelative
thesamecountries
seemsto be
Theevidence
skilledlaborandthusstemthefallin inequality.
risThatis,thecorrelation
between
withthesepredictions.
consistent
roughly
turnsoutto bebetterfor1870-90-an
andinitiallaborscarcity
inginequality
of
liberal
trade
shared
polices-thanfor 1890-1913-anenvienvironment
on theContinent.9
of risingprotection
ronment
of
Asindicated
above,theimpact
I turnnexttotheimpact
ofmassmigration.
in sendingandreceiving
countries
between
on laborsupplies
massmigration
forthreeNewWorlddestination
counfrom37percent
1870and1910ranged
thelargest
labor)to
supplyof immigrant
at44 percent
absorbing
tries(Canada
countries
losing
forsixpoorEuropean
(Italyat-39 percent
-18 percent
sending
onthereceiving
country's
impact
Migration's
share
ofitslaborsupply).
thelargest
withaninitialscarcity
oflabor,
laborforceisalsoknownto behighlycorrelated
is therefore
a
andWilliamson
notperfectly
1994).Migration
(Hatton
although
for
distribution
trends.
the
Figure5 plots
in accounting the
primecandidate
Figure 5. Inequality Trends vs. Migration's Impact on Labor Force, 18 70-1913
Averageannualpercentagechange in inequalityindex
1
Sweden'm
Denmark
Falling
inequality
0.5-
Norway
Belgium
2~~
-0.5 -
Portugal*
Netherlands
United Kingdom U
-1 -
Spain U
Canada
IGermany
France
2~~~~~~~
Australia
Rising
inequality
United States
I
-20
-1.5
-40
l
0
20
40
128
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thereceiving
whereimmigration
increased
result:
country'slaborsupply,
inequality
reduced
thesendingcountry's
laborsupply,
whereemigration
rosesharply;
inequality
declined.
it is impossible
to decomposeglobalization
effectsintotrade
Unfortunately
andmigration
because
thecorrelation
between
usingthisinformation
migration's
Yet
an
has
been
so
effort
madeby
is
impactandinitiallaborscarcity high.
a trade-globalization-impact
variableas the interaction
of initial
constructing
isstill
Theresultisthattheimpactofmigration
and"openness."
laborscarcity
ratesweresmall,
andoftherightsign:whenimmigration
powerful,
significant,
trends
whenemigration
rates
werebig,egalitarian
inegalitarian
trends
wereweak;
werestrong;
whencountries
hadto accommodate
heavyimmigration,
inegalitariantrendswerestrong.In theOldWorldperiphery,
wherelaborwasmost
hadmoreegalitarian
themoreopeneconomies
abundant,
trends,justasthe
Heckscher-Ohlin
It appears
thattheopen
trademodelwouldhavepredicted.
ofthattimeenjoyed
whilethoseamong
economy
tigers
benign
egalitarian
effects,
themoptingforautarky
didnot.IntheOldWorldindustrial
core,thiseffect
wasfarlesspowerful.
Itappears
thatopeneconomy
effectsonincomedistributionwereambiguous
in Europe
industrial
amongtheland-scarce
leaders
where
thefarmsectorwasrelatively
small.'0
Heckscher
andOhlinwouldhavepredictedthisresulttoo.Inthelaborscarce
NewWorld,however,
themoreopen
economies
alsohadmoreegalitarian
whichiscertainly
notwhat
Heckscher
trends,
andOhlinwouldhavepredicted.
Theresultis notsignificant,
however.
I readthisevidence
asstrongsupport
Overall,
fortheimpactof massmigrationon incomedistribution
andasweaksupport
fortheroleof trade.This
empirical
exercise
explains
abouttwo-thirds
of thevariance
in distributional
trendsacrossthelatenineteenth
century.
Whatforcescouldpossibly
account
fortheremaining
third,forcesthatwerealsohighlycorrelated
withinitiallabor
andGDPperworker-hour?
scarcity
Latetwentieth
century
criticsof theglobalizationthesishavearguedthatthe answerlieswithtechnological
change.
Lawrence
andSlaughter
(1993)contendthata skill-using
biasin theUnited
Stateshasdrivenrisinginequality.
Woodcounters
thatit cannotbesobecause
in theUnitedStatesandtheotherOECDcountries
inequality
wason therise
inproductivity
justwhentheslowdown
wasin fullswing.Whichever
viewthe
reader
believes,
it is important
to remember
thatwearesearching
foranexplanationthatcanaccountsimultaneously
forfallinginequality
in the South,ris-
intheNorth,andsomemixture
inginequality
amongthenewlyindustrializing
countries
in themiddle.Butis thereanyreasonto believethattechnological
changeshouldbe unskilledlabor-saving
in richcountriesand unskilled
labor-using
in poorcountries?
Thisissuehasbeenexplored
atlength(O'Rourke,
Taylor,andWilliamson
1996)usingthedataon the ratioof wagesto landrentshownin figure2.
JeffreyG. Williamson
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129
Almostbydefinition,
industrial
revolutions
embodyproductivity
growththat
favorsindustry.Becauseindustrial
outputmakeslittleuseof farmland,
indus-
instead
raisestherelative
demands
trialization
forlaborandcapital.
Industrial
to raisewagesrelative
to landrents.According
revolutions
to
tend,therefore,
thisprediction,
morerapidindustrialization
inEurope
thanin theNewWorld
ratioby morein Europe.Suchevents
shouldalsohaveraisedthe wage-rental
toaconvergence
inthepricesoffactors
ofproduction,
shouldhavecontributed
to thosein theNewWorld.
a risein realwagesin Europerelative
including
if productivity
advance
wouldbe reinforced
in thelatenineThisprediction
andland-using,
astheabovehyNewWorldwaslabor-saving
teenthcentury
andaseconomic
historians
pothesis
believe
suggests
generally
(Habakkuk
1962;
wouldbe fiurther
if
David1974;di Tella1982).Theprediction
reinforced
in theOldWorldwasland-saving
advance
andlabor-using,
productivity
as
historians
believe.
economic
generally
andWilliamson's
results
O'Rourke,
Taylor,
The
(1996,table4) arestriking.
in land-labor
of changes
combination
ratiosandcapitaldeepening
accounted
of thefallin thewage-rental
forabout26 percent
ratioin theNewWorld,but
fornoneof its risein the OldWorld.-Commodity
priceconvergence
and
effectsaccounted
Heckscher-Ohlin
forabout30percent
of thefallintheNew
Worldwage-rental
ratioandforabout23 percent
of itsrisein theOldWorld.
in productivity,
Advances
aspredicted,
werelabor-saving
in thelabor-scarce
in thelabor-abundant
NewWorldandlabor-using
OldWorld.Labor-saving
to haveaccounted
technologies
appear
forabout39 percent
of thedropin the
ratioin the NewWorld,whilelabor-intensive
wage-rental
technologies
acforabout51percent
counted
ofitsriseintheOldWorld,powerful
technologicalforcesindeed.1'
Globalization
formorethanhalfof therising
accounted
in richcountries
inequality
andfora littlemorethana quarter
of thefalling
in poorones.Technology
inequality
forabout40 percentof the
accounted
risinginequality
in richcountries
in thefortyyearsbeforeWorldWarI, and
about50 percent
of thedeclinein inequality
in poorcountries.
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Falling Belgium
inequality
*
0
Australia
UnitedStates
Italy
Sweden
Denmark
-2
Norway
M* *Netherlands
-3- .
Rising
inequality
-4 40
France
Germany
,
60
80
100
120
140
160
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131
for the interwarretreatfromglobalization.The connectionbetweenglobalization and inequalitywas also brokenbetweenWorld War I and 1950. Rising
inequalityin the richcountriesstoppedexactlywhen immigrationwaschoked
off by quotas,globalcapitalmarketscollapsed,andthe internationalcommunity
retreatedbehindhigh tradebarriers.Are these interwarcorrelationsspurious?
The pre-WWI experiencesuggestsnot.
Is therea lessonfromthishistory?Will theworldeconomysoon retreatfrom
its commitmentto globalizationjust as it did almosta centuryago?
Notes
JeffreyG. Williamsonis the LairdBell Professorof Economicsand faculty affiliateat the
HarvardInstitutefor InternationalDevelopmentat HarvardUniversity.A longerand more
technicalversion of this paperappearedas NBER Working Paper5491 and is availableon
request(jwilliam@kuznets.fas.harvard.edu).
The researchunderlyingthis paperwassupported
by the National ScienceFoundation.I am gratefulfor the excellentresearchassistanceof Bill
Collins,Asim Khwaja,andTien Quek, aswell as for usefulcommentsfromMoe Abramovitz,
Don Davis, Ron Findlay,Tim Hatton, Doug Irwin,Ed Leamer,KevinO'Rourke,Sherman
Robinson,Alan Taylor,AdrianWood, and refereesof The WorldBankResearchObserver.
1. See,for example,Baldwinand Cain (1994), Bergstrandandothers(1994), Bhagwatiand
Dehejia (1994), Bhagwatiand Kosters(1994), Borjasand Ramey(1994), Freeman(1995),
Freemanand Katz(1994), KrugmanandVenables(1995), Leamer(1994, 1995), Richardson
(1995), Wood (1995a, 1995b), and World Bank (1995).
2. Before1870 the full sampleincludesAustralia,Belgium,Brazil,France,Germany,Great
Britain,Ireland,the Netherlands,Norway,Portugal,Spain, Sweden,and the United States.
After 1870, the sampleincludesArgentina,Canada,Denmark,and Italy.
3. The Smoot-Hawleytariffof 1930 is infamousfor its allegedcontributionto the Great
Depression.Yetthe ad valoremtariffequivalentlevelswere42.5 percentunderSmoot-Hawley,
an increaseof only 8 percentagepoints over the levelsimpliedby the 1922 TariffAct (Irwin
1995, table 1). A tariff-induced8-percentage-pointincreaseseems tiny comparedwith a
45-percentage-pointdecreasein cost as a resultof decliningtransportchargesbeforeWorld
War I-one-sixth the magnitudein fact!
4. Commoditypriceconvergenceaccountsfor aboutthree-tenthsof realwageconvergence
betweenthe United Statesand Britainduringthe twenty-fiveyearsafter1870 and aboutonetenth of the convergencebetweenthe United Statesand Swedenover the four decadesafter
1870; however,Anglo-American
commoditypriceconvergenceeffectswereswampedby other
forces after 1895, and they made only a modest contributionto Anglo-Swedishreal wage
convergenceover the four decades as a whole (O'Rourke and Williamson 1994, 1995).
O'Rourke,Taylor,andWilliamson(1996) turnedto econometricanalysisof wage-rentaltrends
in sevencountries(includingBritainand Sweden)to searchfor the averagecase.They found
that commoditypriceconvergencecould explainabout a quarterof wage-rentalconvergence
betweenthe New World and the Old World. These estimatesareclose to the 10-15 percent
reportedby Richardson(1995, p. 36) for the contributionof tradeto rising United States
inequalityfrom the 1970s.
5. As faras I am aware,recentstudiesof the globalization-inequality
connectionin developing countriesfocus almostexclusivelyon wage inequality,and sometimesonly on urbanwage
inequality.I think this is a big mistakefor countrieswhereruralwage employmentis signifi-
132
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References
The word "processed"describesinformallyreproducedworks that may not be commonly
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