Proposal preview

Trade and Long-Term Development: Evidence from Three Millennia of Data

Openness to trade has the potential to affect the long term development of regions through a variety of mechanisms. Throughout the course of history, improvements in shipping and trading technology have dramatically lowered the barriers to trade. The first three papers in this session explore the impact of three particular technologies; open sea shipping, the chronometer and the global telegraph network. The final paper shows how financial frictions shape trade patterns. By bringing these papers together in one session, the aim is to foster discussion both on the mechanisms at work in different historical contexts and the way they impact our understand of the central question of how trade affects growth.

Organizer(s)

  • Claudia Steinwender MIT Sloan csteinwe@mit.edu
  • Reka Juhasz Columbia University rj2446@columbia.edu

Session members

  • Jorn Steffen Pischke, London School of Economics
  • Stephan Maurer, University of Konstanz
  • Ferdinand Rauch, University of Oxford
  • Jan Bakker, University of Oxford
  • Claudia Steinwender, MIT Sloan
  • Reka Juhasz, Columbia University
  • Luigi Pascali, Universitat Pompeu Fabra
  • Alessandro Iaria, University of Bristol
  • Martina Miotto, University of Warwick
  • Chenzi Xu, Harvard University

Discussant(s)

  • Luigi Pascali University of Warwick L.Pascali@warwick.ac.uk
  • Mara Squicciarini Bocconi University mara.squicciarini@unibocconi.it
  • Chenzi Xu Harvard University chenzi.xu@gmail.com
  • Jules Hugot Asian Development Bank jules.hugot@gmail.com

Papers

Panel abstract

Openness to trade has the potential to affect the long term development of regions through a variety of mechanisms. Throughout the course of history, improvements in shipping and trading technology have dramatically lowered the barriers to trade. The first three papers in this session explore the impact of three particular technologies; open sea shipping, the chronometer and the global telegraph network. The final paper shows how financial frictions shape trade patterns. By bringing these papers together in one session, the aim is to foster discussion both on the mechanisms at work in different historical contexts and the way they impact our understand of the central question of how trade affects growth.

1st half

Of Mice and Merchants: Trade and Growth in the Iron Age

Jan David Bakker, Stephan Maurer, Joern-Steffen Pischke, Ferdinand Rauch

We study the causal connection between trade and development using one of the earliest massive trade expansions: the fi rst systematic crossing of open seas in the Mediterranean during the time of the Phoenicians. We construct a measure of connectedness along the shores of the sea. This connectivity varies with the shape of the coast, the location of islands, and the distance to the opposing shore. We relate connectedness to local growth, which we measure using the presence of archaeological sites in an area. We fi nd an association between better connected locations and archaeological sites during the Iron Age, at a time when sailors began to cross open water very routinely and on a big scale. We corroborate these findings at the level of the world.

We study the causal connection between trade and development using one of the earliest massive trade expansions: the fi rst systematic crossing of open seas in the Mediterranean during the time of the Phoenicians. We construct a measure of connectedness along the shores of the sea. This connectivity varies with the shape of the coast, the location of islands, and the distance to the opposing shore. We relate connectedness to local growth, which we measure using the presence of archaeological sites in an area. We fi nd an association between better connected locations and archaeological sites during the Iron Age, at a time when sailors began to cross open water very routinely and on a big scale. We corroborate these findings at the level of the world.

Spinning the Web: The Impact of ICT on trade in intermediates and technology diffusion

Reka Juhasz, Claudia Steinwender

This paper studies how information and communication technology (ICT) improvements affect trade along the value chain and international technology diffusion. We examine the impact of a revolutionary technology, the roll-out of the global telegraph network, on the 19th century cotton textile industry. First, we show that connection to the telegraph disproportionately increased trade in intermediate goods relative to final goods. We document that this was due to differences in codifiability; that is, the extent to which product specifications could be communicated at a distance using only words (and thus by sending telegrams) as opposed to inspecting a sample of the product. Second, adoption of the telegraph also facilitated international technology diffusion through the complementary mechanisms of importing machinery and acquiring knowledge of the production process and local demand through importing intermediates. These results shed light on how ICT facilitates the formation of global value chains and the diffusion of frontier...

This paper studies how information and communication technology (ICT) improvements affect trade along the value chain and international technology diffusion. We examine the impact of a revolutionary technology, the roll-out of the global telegraph network, on the 19th century cotton textile industry. First, we show that connection to the telegraph disproportionately increased trade in intermediate goods relative to final goods. We document that this was due to differences in codifiability; that is, the extent to which product specifications could be communicated at a distance using only words (and thus by sending telegrams) as opposed to inspecting a sample of the product. Second, adoption of the telegraph also facilitated international technology diffusion through the complementary mechanisms of importing machinery and acquiring knowledge of the production process and local demand through importing intermediates. These results shed light on how ICT facilitates the formation of global value chains and the diffusion of frontier technology.

2nd half

Financial Frictions in Trade: Evidence from the 1866 Global Financial Crisis

Chenzi Xu

Bank failures can have long-term effects on the levels and patterns of economic activity. This paper shows that banks transmit credit supply shocks from the core financial market to the periphery through the network of multinational banks, and that these supply shocks depress international trade for several decades. The largest banking crisis in Britain’s history in 1866 provides a unique opportunity for observing the universe of trade financing relationships around the world. During this crisis, 20% of multinational banks headquartered in London failed because of their connections to a fraudulent interbank lender, Overend and Gurney. I use loan-level microdata from archival records to measure exposure to this financing shock in cities around the world. In the short-term, there are significant losses to intensive margin trade activity that aggregate to global losses of 16% of the value of trade. There are also losses on the extensive margin in the number of...

Bank failures can have long-term effects on the levels and patterns of economic activity. This paper shows that banks transmit credit supply shocks from the core financial market to the periphery through the network of multinational banks, and that these supply shocks depress international trade for several decades. The largest banking crisis in Britain’s history in 1866 provides a unique opportunity for observing the universe of trade financing relationships around the world. During this crisis, 20% of multinational banks headquartered in London failed because of their connections to a fraudulent interbank lender, Overend and Gurney. I use loan-level microdata from archival records to measure exposure to this financing shock in cities around the world. In the short-term, there are significant losses to intensive margin trade activity that aggregate to global losses of 16% of the value of trade. There are also losses on the extensive margin in the number of destinations and in the likelihood that a city engages in international trade at all. In the long-term, aggregate exports recover quickly, but the financing shock causes a shift in the patterns of trade that persists for decades. Countries that are geographically or institutionally more distant sever trading relationships, which can be rationalized in a model where credit-constrained exporters can only substitute from bank-intermediated financing to importer-financing if contractual frictions are low.

Navigation, World Trade and the Chronometer

Alessandro Iaria, Martina Miotto, Luigi Pascali

For centuries, seafaring explorers and merchants struggled with the longitude problem. Until the end of the eighteenth century, although it was relatively easy to measure the latitude, there was no reliable way of measuring a ship’s longitude once land was out of sight. Some of the greatest minds of all times devoted great effort trying to develop a practicable and accurate method, such as Vespucci, Werner, Galileo, and Newton. The invention of the chronometer solved the longitude problem and opened a new era for the shipping industry. We study the effect of the chronometer on navigation speed and trade flows exploiting the fact that the chronometer produced an asymmetric change in trade distances among countries.

For centuries, seafaring explorers and merchants struggled with the longitude problem. Until the end of the eighteenth century, although it was relatively easy to measure the latitude, there was no reliable way of measuring a ship’s longitude once land was out of sight. Some of the greatest minds of all times devoted great effort trying to develop a practicable and accurate method, such as Vespucci, Werner, Galileo, and Newton. The invention of the chronometer solved the longitude problem and opened a new era for the shipping industry. We study the effect of the chronometer on navigation speed and trade flows exploiting the fact that the chronometer produced an asymmetric change in trade distances among countries.