The Economist 1492 and all that did Europe's "age of discovery" give birth to an age of globalisation?



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1492 AND ALL THAT
Did Europe's "age of discovery" give birth to an age of globalisation?

THE word "globalisation" is a new one, coined in the age of Davos and the

Big Mac. But global economic integration is an old process  and just how old is

the stuff of fierce debate. There is plenty of evidence that, in several ways,

international economic links were closer in the 19th century than in much of

the 20th. Some go farther back, to the trade boom that followed the voyages

of Christopher Columbus and Vasco da Gama at the end of the 15th century. But

why focus on Europe, say others? Dennis Flynn and Arturo Giraldez, of

California's University of the Pacific, reckon that the world economy was "born" in the

1570s, by which time trade linked Europe, the Americas, Asia and Africa.


Yet a provocative recent paper* argues that there is little evidence that world markets were truly

integrated before about 1800. Kevin O'Rourke, of Trinity College, Dublin, and Jeffrey

Williamson, from Harvard University, agree that European trade with the rest

of the world boomed after 1500. It rose by about 1.1% a year over the next three centuries, probably faster than GDP. Evidence, surely, of global integration?


Not enough for economists, say the authors. For the test is not the quantity

of trade, but the price of traded goods. In a single market, the price of

spices relative to, say, the price of grain ought to be the same everywhere.

If the relative price of spices was much higher in the Netherlands than in the

East Indies, that would create profitable opportunities for pepper exports

to the Netherlands. As supply increased, however, the price gap should have

closed. So if the world economy was becoming more integrated in the 16th,

17th and 18th centuries, relative prices in Europe and its new trading partners

in Asia and the Americas should have moved closer together.
The trouble, say Mr O'Rourke and Mr Williamson, is that nothing of the sort

seems to have happened. For example, the mark up on cloves imported into

Amsterdam from South East Asia fell in the first half of the 17th century,

and then soared: it was far higher throughout the 18th century than it had been

in the 17th. Contrast this with the 19th century  a period previously studied

by the pair  when relative prices did converge.


Which raises two questions. Why did prices not converge? And, if market

integration did not cause the trade boom, then what did? The answer to the

first question is straightforward: trade was not free. There were high

import tariffs, and trade was dominated by state sponsored monopolies, such as the

Dutch and British East India Companies. So there was little chance of the

gap between prices in Asia or the Americas and Europe being narrowed by

competition.
The answer to the second question lies in a combination of rising import

demand from Europe, and rising export supply from Asia and the Americas. In some

periods, demand was the main cause; in others, supply. The authors argue

that European import demand depended on the incomes of the richest classes, the

only people likely to be able to afford such luxuries as spices, coffee and

foreign cloth. Because these people were landowners, their fortunes hung on the

price of land, which in turn may have been linked to population growth. When the

population increased, this drove up the demand for land and therefore rents,

putting more money in landlords' purses. It explains most of the increase in

trade in the 17th century  when rising demand also pushed up the relative

price of imports  and more than half of the increase in the 18th century.
However, during the 16th century European landlords' incomes fell. The

chances are that import demand was also weak. The relative price of Asian imports al

so fell during the century, while that of goods from the Americas rose. So the

increase in trade during that period was probably based on an increase in

the supply of goods from Asia to Europe.
AUTARKY AND THE MANILA GALLEON
Controversially, Mr O'Rourke and Mr Williamson wonder whether Chinese trade

policy may have been a cause of this. From the middle of the 15th century,

China stopped sending naval and "treasure" fleets abroad; thereafter its

trade policy varied, but was officially far less open, even autarkic. If China,

then a huge power accounting for perhaps one quarter of world GDP, stepped back

from trade, could it be that exports from the rest of Asia were diverted towards

Europe? Europe's trade boom would then be a product not of global economic

integration, but of its opposite.


Students of China are sceptical. Maybe, says Kenneth Pomeranz of the

University of California, Irvine, the policy of autarky did have some effect. But the

Chinese remained the biggest traders at important South East Asian ports.

"For most of the period," he says, "there really was no Chinese withdrawal from

trade."
In a new paper,** Mr Flynn and Mr Giraldez chart the enormous flows of Latin American silver

to China between 1500 and 1800, for use as currency. In the early 16th century,

the price of silver in terms of gold was about twice as high in China as in

Europe; the price gap lasted from 1540 until it disappeared under the weight

of increased silver production, mainly from Latin American mines such as the

great complex at Potosi, by about 1640. The huge, enduring arbitrage opportunity

drew in the metal: Spanish galleons brought more than 50 tons a year from

Acapulco to Manila, whence Chinese merchants carried it on. Another big price gap

opened up in the 18th century. Meanwhile, Chinese silk, porcelain and tea flowed

out of the country. "The idea that China was autarkic in this period is a

ridiculous myth," says Mr Flynn.
Still, say Mr O'Rourke and Mr Williamson, the effect of China's policy,

especially on relative commodity prices, is worth quantifying. The idea that

China was trading all the while does not mean that the official policy had

no effect. And if the effect was small, then why did Asian export supply

expand?

China aside, there is a lot else for historians to argue about. Evidence,



anybody?
* After Columbus: Explaining the Global Trade Boom, 1500 1800", by Kevin

O'Rourke and Jeffrey Williamson. Centre for Economic Policy Research, 2001.


** "Cycles of Silver: Global Economic Unity through the mid 18th

Century",



by Dennis Flynn and Arturo Giraldez. Forthcoming, the JOURNAL OF WORLD

HISTORY.


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