Discussion Paper No. 678

ENDOGENOUS TRADE POLICY:POLITICAL STRUGGLE
IN THE GROWTH PROCESS

Yoshiaki Sugimoto

December 2006

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

Endogenous Trade Policy:
Political Struggle in the Growth Process
Yoshiaki Sugimoto
December 21, 2006

Abstract
This paper develops a dynamic theory that accounts for the evolution of trade policy, underlying internal class con‡icts, and output growth performance over the last few centuries.
By analyzing political responses to the distributional e¤ects of international trade, it …nds a
prominent interaction between trade policy and the pattern of economic development, and also
a signi…cant role for trade liberalization in economic take-o¤.

Consistent with historical evi-

dence for Western Europe, land-scarce economies reach a developed stage through the ebb and‡ow of liberalism. In contrast, land-abundant countries tend to stagnate because of landlords’
opposition to industrialization.

Keywords: Trade Policy, Growth, Class Con‡ict.
JEL Classi…cation: F10, F13, F43, O11, O40.

Institute of Social and Economic Research, Osaka University, 6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan;
E-mail: sugimoto@iser.osaka-u.ac.jp I am grateful to Oded Galor, Wolfgang Keller, Pravin Krishna, Omar Licandro, and seminar participants at Brown University, the European University Institute, Kobe University, the National
Graduate Institute for Policy Studies, Osaka University, and the University of Tokyo for useful comments and encouragement. In addition, I wish to thank Daniel Mejia and Je¤rey G. Williamson for supplying data. This researchis supported by a JSPS Grant-in-Aid for Scienti…c Research (No. 18830036).

1

1

Introduction

Over the last two centuries, the world economy has witnessed two epochal phenomena never seen
before: the rapid expansion of international trade and the emergence of income gaps between
nations. The approximate growth rate of intercontinental trade was 3.5% per annum in this period,
while the …gure was 1.1% per annum between 1500 and 1800 (O’Rourke and Williamson 2001, Table1). The gap between the West and the rest of the world in average per capita GDP was nearly 2:1
in 1820, whereas it was as much as 7:1 in 1998 (Maddison 2001, Table 1-9b, 46).
While these …gures have brought a potential link between international trade and long-run
growth performance to many economists’attention, there seems to be no established theory that
accounts for their historical relationship. As pointed out by Williamson (2003), the role of international trade has typically been neglected by the recent literature that analyzes the transition
from Malthusian stagnation to modern growth.1 Even the few exceptions, such as the work of
McDermott (2002) and Galor and Mountford (2003), treat the emergence of international trade as
being exogenous.2 On the other hand, the literature on endogenous tari¤ theory primarily uses
static frameworks that ignore the dynamic aspects of trade and aggregate output.3
This research distinguishes itself from these previous articles by exploring the historical evolutionof trade policy and economic growth. Analyzing political responses to the distributional e¤ects oftrade, the research …nds that there is a prominent interaction between trade and growth, andemphasizes the role of trade liberalization in economic take-o¤.
The analysis is focused on the development of Western Europe since the mid-17th century,
dividing it into three distinct epochs of trade policy.4 In the …rst epoch (1660–1830s), Western
1
See, for example, Goodfriend and McDermott (1995), Galor and Weil (2000), Kogel and Prskawetz (2001), andHansen and Prescott (2002).
2
There are two other notable articles relevant to the present paper. McDermott (1999) endogenizes a country’s
openness by incorporating government motivation for mercantilistic protection against the in‡ow of foreign ideas. In
contrast to the present article, McDermott does not study international trade in commodities and, hence, overlooks
the substantial impact of grain in‡ow on the 19th-century European economy. Baldwin et al. (2001) develop a growthmodel in which exogenous reductions in the costs of trading goods (such as shipping costs and those associated with
political barriers) promote industrial agglomeration in the North and thereby generate substantial income di¤erences
between the North and the South.
3
See Mayer (1984), Magee, Brock and Young (1989), and Grossman and Helpman (1994), among others.
4This paper focuses on the international trade between Western Europe and the rest of the world, including Eastern
Europe, and also focuses on restrictions on importing agricultural goods, rather than manufactured or other goods. As
is well known, the grain trade was initially limited to the European continent because of underdeveloped transportsystems. Amsterdam played a central role in determining grain prices in Europe in the 17th and 18th centuries(Glamann 1974, 457). In the 18th century, England and France shifted from intra-European trade to intercontinental
trade (Kriedte 1983, Chap. 3), and by the 1770s Atlantic trade became the engine of European economic growth2

European countries imposed severe restrictions on the import of grain, one of the main foodstu¤s,thereby adversely a¤ecting most people’s living standards. The second epoch (1830s–1870s) was
marked by a decisive shift toward free trade. The resulting in‡ux of grain, especially from the New
World and Russia, had substantial impacts on income distribution within societies. In response to
the grain invasion, many of these nations went back to the protection of domestic agriculture, acompeting sector. This political backlash characterizes the third epoch, which continues today. On
top of these three historical stages, the theory developed in this paper predicts a second wave ofglobalization in the fourth and …nal stage. Thus, economies undergo two surges of liberalism witha stage of protectionism in between.
This paper accomplishes two worthy objectives. The primary objective is to analyze the nonmonotonic evolution of trade policy experienced by Western Europe, a region plausibly regarded
to have been scarce in land and abundant in capital.5 This nonmonotonicity re‡ects qualitativechanges in individuals’ stances on trade liberalization in the process of economic development.
The present paper provides a political-interest-based explanation for the determination of openness
through an internal political process, rather than through diplomatic games played among trading
countries.6 The secondary objective of the paper is to explain why some economies do not achieve
trade liberalization and remain stagnant.
This paper develops a two-sector, two-good, overlapping-generations economy that uses two
speci…c factors, land and capital, and one mobile factor, labor.7 The model features three elementsthat alter individuals’ trade policy preferences in the growth process. The …rst element is the
expansion of consumption bundles. While there are two marketable consumption goods, food anda manufactured good, the former is essential to low-income households for their survival. Hence,(ibid., 125). For example, Carolina’s rice exports increased …vefold between 1720 and 1740 (Nash 1992, 687).
5
According to careful investigation by Rogowski (1989, pp. 154–158), as late as 1600, Northwestern Europe wasabundant in capital and scarce in land, whereas Eastern Europe was abundant in land and scarce in capital. During
the 16th century, the vast granaries of eastern Germany and Poland had achieved rapid growth, and by the …rst halfof the 17th century, an annual average of 140,000 tons of grain ‡owed into North-Western Europe through the Danish
Sound (De Vries 1976, 33). Although England was a net exporter of many types of grain in the …rst half of the 18th
century, this was largely because of the bounty and was thus known as “a forced export” (Ormrod 2003, 216–217).
6
The interest-based approach is adopted by Rogowski (1989), who applies the Stolper–Samuelson theorem tointerpret class and rural/urban con‡icts over trade policies in 19th-century European nations. However, he neither
constructs a formal model nor discusses the determination of trade policy. The present article extends this line ofresearch in order to analyze the dynamic interaction between trade policy and economic growth.
7
While the model is an extension of Galor and Moav’s (2004) one-sector, one-good growth model, their researchaccomplishes a di¤erent objective. They explore the e¤ects of distributional policies on subsequent output growth ina closed economy, and suggest that the qualitative e¤ects depend on the stage of development.

3their desired trade policy minimizes the unit cost of food. The second element is the expansion ofincome sources, in the sense that higher-income earners derive revenues from capital, in addition
to their wage incomes. Because wages and interest rates are a¤ected in opposite ways by tradeliberalization, the level of savings is a key determinant of preferences over trade policy. The thirdand last element is the absence of land markets. This prevents the returns on land and capitalfrom being equalized, which provides landowners with an incentive to support proagricultural trade
policies.
The theory developed in this paper presents the following scenario for the evolution of a landscarce, capital-abundant economy. In the early stages of development, the economy operates undera closed system in which, because of the scarcity of land and the necessity of food, the agricultural
sector absorbs a substantial part of the labor force. The resulting low wages (in terms of food)prevent the landless poor from purchasing the nonessential manufactured good, and their poverty
sustains the economic dominance of landlords. In contrast, opening up to international trade
breaks this class structure by placing egalitarian pressure on the income distribution. That is, foodconsumption by the poor is enhanced while landlords’ rents are reduced. These two egalitarianforces of globalization— the rise of the working class and the fall of the landed elite— are a prime
incentive for landlords to prefer autarky. Therefore, the initial development process entails apolitical struggle between landed and landless interests. Provided that the former group wields
political power, the economy adopts protectionist policies.
Although free trade raises landlords’revenues derived from industrial capital, this positive e¤ect
is not dominant in the initial stages when industrial capital is a minor asset in their portfolios. However, in later stages, capital accumulation, in conjunction with a limited supply of land, graduallyraises the relative importance of capital for landlords and thereby makes industrial specialization
pro…table for them. Through this mechanism, an epochal policy switch to free trade takes placeand dissolves class con‡ict between landlords and workers. The theory of this paper also raises thepossibility that the economy remains closed because of the supply of land: given a certain amountof land, landlords adhere to protectionist policies because agriculture is their main income source.
For this reason, an abundance of land tends to prevent or delay the industrialization process underfree trade.
As the economy develops under free trade, further specialization in manufacturing raises wage
4

rates (in terms of food), and this eases the food constraint that binds the working class. This
improvement in living standards permits landless workers to consume the manufactured good aswell as food. In these circumstances, they may be less supportive of liberal (i.e. proindustrial andantiagricultural) policies, because industrial specialization raises the relative price of the manufactured good. Noting that the degree of worker opposition to liberalization hinges on the wage
elasticity with respect to the trade policy that is pursued, the theory predicts that the elasticity
depends on the supply of land. Consistent with the historical experience of Western Europe, it
is shown that the protection of agriculture emerges in moderately land-scarce countries (such as
Germany and France), whereas severely land-scarce countries (such as the United Kingdom) tend
to maintain liberalism. Hence, as long as rising wages lead to an extension of the franchise, thepolitical participation of the landless class causes a resurgence in protectionism.
Unless the political backlash is overwhelming, capital accumulation continues to boost output
and real wages, which ultimately enables everyone to generate savings. Because trade liberalization
leads to a rise in interest rates, all individuals support proindustrial liberal policies in later stagesof development when their savings are su¢ cient and when owning land is not particularly lucrative.
This eventual shift to liberalism should be interpreted as a prediction of the type of trade policy
to be pursued in a forthcoming stage of development. This is because most current developed
countries still adhere to agricultural protection. In other words, it is di¢ cult to introduce tradeliberalization without promoting political con‡ict. This is because reaching such a high stage ofdevelopment requires highly productive technology in the industrial sector.
It is worth discussing the empirical relevance of the model developed in this paper. The model
can be viewed as a rami…cation of the Heckscher–Ohlin model, in the sense that it enables one
to explore the e¤ect of a relative commodity price on factor prices. While many empirical papers
based on postwar data …nd that the Heckscher–Ohlin model performs poorly (see, e.g., Leontief
1953 and Tre‡er 1995), O’Rourke et al. (1996) …nd that it performs reasonably well in the late
19th century, which is the period on which this paper focuses. Their results indicate that thefactor-price convergence between the Old and New Worlds in this period was driven by commodityprice convergence. This evidence supports the factor-price-equalization theorem derived from theHeckscher–Ohlin model.
The rest of this paper is organized as follows. Section 2 presents historical evidence on European
5

trade policy and economic development. Section 3 describes the basic structure of the model.
Section 4 derives the market equilibrium and the political equilibrium in each period. Section 5,
the main part of the paper, demonstrates the coevolution of trade policy and output, as experienced
by industrial economies, and also demonstrates the possibility of a poverty trap arising because ofa failure to liberalize trade. Section 6 concludes the discussion and proposes possible extensions to
the research. Proofs of technical results are in the Appendix.

2

Historical EvidenceThis section presents the historical evidence on Western European trade policy and economic
development that supports the central argument of the paper.8 As mentioned in the introduction,
this paper considers trade in goods between Western Europe and other regions. The investigation
dwells on the role of trade policy, rather than transportation costs, in determining a country’s
openness. Moreover, in the context of the paper, trade protection means restrictions on the importsof agricultural goods, rather than of manufactured or other goods. The following three epochs
construct a broad picture of the history of Western European trade policy over the last threecenturies.

2.1

The Age of Protectionism, 1660–1830s

Protectionism was the prevailing doctrine in Europe during this period, and the import of grain
was severely constrained by national laws, the most well known and important of which were the
British Corn Laws, which were in force until 1846.9 According to Bairoch (1989, 7–8), “It should be
noted that ‘Corn Laws’were a quasi-permanent feature of tari¤ history in most European countries.
They had always aimed at a precarious balance between protecting local agriculture and preventing
the price of bread rising too steeply.” For instance, Burke’s Act of 1773 …xed the threshold pricefor the domestic market, above which wheat could be imported, at 44 shillings per quarter, andwas later raised to 80 shillings per quarter by the law of 1815 (ibid., 8).10 Likewise, in France,
8

I thank Daniel Mejia and Je¤rey G. Williamson for supplying Figure 1 and Figures 2(a)–2(b), respectively.
The term ‘corn’did not merely mean American corn or maize; rather, the term meant grains such as wheat, oats,rye, barley, malt, peas, beans, and maize (Barnes 1965, 7). Although the British Corn Laws existed before 1660, it
was not until 1660 that the government restricted the import of grain and encouraged grain exports (Barnes 1965,
8 and Glamann 1974, 465). Unlike the UK, most European countries were protectionist at least until the early 19th
century (Bairoch 1989, 6–7). This paper conventionally sets 1660 as the initial period of analysis.
10
A quarter of wheat was 217:7 kg.
96

landowners succeeded in introducing a sliding scale tari¤ to protect cereals between 1815 and 1845
(Fohlen 1973, 30). Before the 19th century, protectionist policies against foreign grain generally
restricted intracontinental trade, rather than intercontinental trade.11
The absence of grain imports kept European economies under agricultural-land constraints.
Using British data from between 1565 and 1936, O’Rourke and Williamson (2000) found a clear
relationship between commodity and factor prices and endowments for the pre-1828 period. They
also noted that this relationship broke down after 1828, rather than after the 1490s, which was theera of the Voyages of Discovery. Based on this …nding, they suggest that for the period before 1828,
the closed-economy model is superior to the open-economy model, which is better for the period
after 1828.
Some evidence indicates that the living standards of the working class did not improve in thisepoch; rather, they deteriorated. For instance, Allen (2001, 427–429) reports that indicators of
the welfare of laborers in many European cities trended downward or were stable between 1500
and 1800; they suggest that incomes were just enough to cover rents and necessities. Similarly,
Ho¤mann et al. (2002) found that for the period between 1500 and about 1800, both unskilledlabor and luxury goods generally became cheaper relative to staple foods (grains and bread) inmajor European regions (Table 2 and Figure 1, 331–333). They also found that working people
spent a greater share of their budgets on grain than did upper class people in England and Wales,
France, and the Netherlands (Table 1, 326–327).12 Consistently with this evidence, the growthmodel developed in this paper predicts that the relative price of food rises under autarky.

11

It appears that intercontinental trade in grain was not the primary concern of pre-19th century policy makers
because of substantial freight costs. Some historians, such as Irwin (2001) and Taylor (2002), argue that it wasunderdeveloped shipping technology, rather than protectionist policies, that constrained intercontinental trade fromthe 16th century to the 18th century. While Europe engaged in trade with other continents, such as the New
World, Asia, and India following the Voyages of Discovery, most traded commodities between 1500 and 1800 were
noncompeting luxury goods, which were of high value relative to their transport costs. Examples include pepper,
other spices, cotton textiles, tea and co¤ee from Asia, and sugar, tobacco and silver from the Americas (Findlay
and O’Rourke 2001, 7–10 and Table 1). Because luxury goods were beyond the budget of low-income groups,
intercontinental trade was of little relevance to living standards, except those of elite Europeans (Irwin 2001 andWilliamson 2002c, 16).
12
In England and Wales in 1688, the bottom 40% of income earners spent about 35% of their incomes on breadand other grain, whereas the top 5% spent only 4.2% on these goods. In France, rural workers spent 30.8% of theirincomes on bread and other grain in 1763, whereas middle and upper class people spent only 1.7% on these items in
1788. This implies that the relative price of grain was more important for the living standards of poorer people.

7

2.2

The First Period of Globalization, 1830s–1870s

The triumph of liberalism was symbolized by Britain’s repeal of the Corn Laws in 1846.13 Williamson(1990, Table 1, 128) estimates that the ad valorem tari¤ equivalent on grain in Britain fell fromabout 71% to about 22% between 1815 and 1845— a signi…cant step toward free trade. Britain’s liberal ideas spread throughout most of Europe, especially after 1860, when Britain and France agreed
on the Anglo-French treaty that incorporated the most-favored-nation clause (Bairoch 1989, 40 and
Minchinton 1973, 100).14 Wheat continually came into Europe from Australia, Argentina, India,
the American mid-west, and Canada, and the value of wheat exports from America increased 20fold between 1850 and 1915 (Woodru¤, 1973, 660).15 In Germany, Belgium, and France, importsof grain accounted for 3% of domestic production in the period 1862–1866 and reached 20% in the
1876–1880 period (Bairoch 1989, 47).
The dismantling of agricultural protection and the associated in‡ow of grain on an enormous
scale brought about two major changes in European economies. The …rst was that within-country
wealth inequalities were reduced. O’Rourke and Williamson (2003) report that in Northwestern
Europe, the wage–land rent ratio had been rising in the 18th century and began to fall in the 19th
century. The second was the specialization in capital-intensive goods, which shifted workers fromagricultural to industrial sectors. Britain’s agricultural workforce began to decline after 1850. Thisdecline was tied to the introduction of new technologies as well as to massive increases in agricultural
imports (Pomeranz 2000, 287). These two dramatic changes show that trade liberalization and theaccompanying grain in‡ows caused a structural breakdown; they transformed Western Europe froman autarkic economy to an open economy and led to the elimination of resource constraints.
Meanwhile, political power was wielded by the landed elite in most European nations. For
example, Aydelotte (1967, 51) reports that the share of the British aristocracy and gentry in the13
As is conventional, this article de…nes the 1830s as the …rst period of globalization. While the triumph of liberalism
was symbolized by Britain’s repeal of the Corn Laws in 1846, the onset of liberalism dates back to the early 1820s.
The progress of British liberalization was gradual but steady during the subsequent period of policy reforms. In 1822,
the nation reduced the threshold price (referred to in Section 2.1) to 70 shillings per quarter (Bairoch 1989, 9).
14“The most-favored-nation clause is a formula by which each of the two signatories to a treaty agrees to grant
the other any advantage, favor, or privilege with regard to trade or navigation that it granted at the time of signing,or that it would grant in the future, to any other nation” (Bairoch 1989, 38–39). According to Minchinton (1973,100), the abolition of grain duties was conducted by the Zollverein in 1853, by Britain in 1860, by France and theNetherlands in 1862, by Italy in 1870, and by Belgium in 1871.
15
The increase from the late 19th century onwards occurred mainly because of reductions in transportation costs
and advances in the technology used for wheat production, rather than because of liberal trade policy. This is because
agricultural protection prevailed during this period in Western Europe.

8House of Commons was roughly 80% in 1846, the year in which the Corn Laws were repealed.
Moreover, as depicted in Figure 1, before the 1870s, the franchise was limited to a small segment of
the population in the main parts of Europe, except France. Because landlords were in the richestclass during this period and because restriction of the franchise was based on incomes, arguably
the most common form of political regime in Europe was one in which the landed elite dominated.
Hence, many of the landlords’preferences were presumably re‡ected in the trade policies adopted,
and trade liberalization would not have been achieved without their broad support.
One of the potential forces behind the policy switch to free trade was, as mentioned in the
introduction, the rising relative importance of industrial capital in landlords’ portfolios.16 Thishypothesis is consistent with the empirical work of Schonhardt-Bailey (1991), who focuses on thecase of Britain in the …rst half of the 19th century. She has documented the increased diversi…cationof the asset portfolios of British landowners and found that Members of Parliament representing
more diversi…ed constituencies were more likely to vote for free trade. In addition, Thompson(1994, 166–167) has documented the aristocracy’s decreasing dependence on agricultural incomesin the 19th century in England.17

2.3

Political Backlash, 1870s Onwards

As shown by Minchinton (1973, 100), the retreat from free trade occurred in much of continental
Europe in the late 19th century (in Italy in 1878, in Germany in 1879, in France in 1881, in
Bulgaria in 1883, in Switzerland in 1884, in Rumania in 1886, in Belgium and Sweden in 1887,
and in Austria–Hungary, Spain, Portugal, and Russia in the same decade). The impact of cheap
New World and Russian grain became evident in European markets by the late 1870s and 1880s,
as is apparent from the 50% decline in real British land rents between 1870 and 1913 (Findlay
and O’Rourke 2001, 35). The general response to this ‘grain invasion’ was to protect domestic
agricultural sectors to a greater extent than industrial sectors.
16

According to O’Rourke’s (2000) recent review of British trade policy, economic historians suggested two othermajor reasons for the repeal of the Corn Laws. Kindleberger (1975) suggests that economic ideas convinced thevoters of the e¢ ciency of free trade. By contrast, Irwin (1989) argues that a gradual loss of faith in Malthusian andRicardian theories prompted the prime minister Robert Peel to convert to liberalism. By contrast, this paper focuseson another potential source of trade liberalization.
17
An empirical study by Scheve and Slaughter (2001) provides indirect evidence for the view that real-estate
ownership a¤ects trade-policy preferences. Based on recent individual-level survey data for the United States, they
con…rm that trade barriers were more likely to be supported by individuals who owned houses in counties whereindustries with comparative disadvantages were concentrated. Home ownership in their study plays a similar role tothat played by the ownership of agricultural land in this paper.

9

Table 1 Import Tari¤ Levels in 1913 (percentage of value)Country

Manufacturers

Wheat

Austria–Hungary

20

35

Belgium

90Denmark—

0

Finland28

0

France21

38

Germany

13

36

Italy

20

40

Netherlands—0

Norway—4Portugal—prohibitive

Spain

34

43

Sweden25

28

Switzerland

82

United Kingdom

00Continental Europe

19

25

Source. Bairoch (1989, Table 9, 76 and Table 16, 139).

Evidence of this series of political backlashes can be observed in time-series and cross-sectional
data. The time-series data illustrated in Figures 2(a)–2(b) show that several geographically large
countries, such as Austria–Hungary, France, Germany, and Italy, were mainly raising tari¤s during
this epoch, whereas the United Kingdom, a geographically small country, was not.18 In fact, theUnited Kingdom maintained free trade until 1932 (Bairoch 1989, Section VI). Turning to the crosssectional data, the bottom row of Table 1 shows that continental Europe was on average more
protectionist against imports of wheat than against imports of manufactured goods. This was thecase in Austria–Hungary, France, Germany, Italy, Spain, Sweden, and, to some extent, Portugal.
The United Kingdom, in sharp contrast, displayed considerable and widespread liberalism. The
asymmetry in European political responses was initially identi…ed by Kindleberger (1951, 33). He
argues that “the response of Germany, France, and Italy to the decline in the world price of wheat
was to impose tari¤s in an attempt to maintain the relative price of wheat and to protect grain
18

Between the 1870s and the 1890s, the average tari¤ rate increased from 4.4% to 10.1% in France, and from 3.8%
to 9.1% in Germany (Blattman et al. 2002, 5).

10

Table 2 Net Exports, 1876–1880 and 1913: Actual Prices ($ million)
1876–1880
Region1913

Primary Products

Manufactures

Primary Products

Manufactures

United Kingdom

1245

640

1836

1150

NW Europe

960

630

2830

1523

Other Europe

235

120

104

555

USA and Canada

270

90

559

157

326

361

936

828

Africa

373

425

Asia

843

786

Oceania
Latin America
838

1250

Sources. Findlay and O’Rourke (2001, Table 4), originally from Lamartine Yates (1959, Tables A.19-A.22).
*Includes Oceania, Latin America, Africa, and Asia.

producers,”whereas “Like Britain, the Netherlands, and Belgium, Denmark did not impose a tari¤on wheat.”A plausible conjecture based on the time-series and cross-sectional data is that between
the 1870s and 1913, core European countries generally became protectionist against foreign trade
and that there was more protection of agriculture than industry.
The resurgence of protectionism was not su¢ ciently powerful to cause a return to the economic
isolation that prevailed before the …rst period of globalization (Williamson 2002a, 4). As shownin Table 2, despite their proagricultural policies, Northwestern Europe and the United Kingdom
remained net importers of primary products and net exporters of manufactured goods at the beginning and at the end of this epoch, whereas the opposite is the case for all the other regions.
Two empirical observations are consistent with this article’s view that the retreat into protectionism was provoked in part by expansion of the working classes.19 First, Figure 1 clearly
illustrates that many European nations experienced a dramatic extension of the franchise aroundthe end of the 19th century, which implies that the middle class was gaining political in‡uence.
Second, in a study that quanti…es the potential impact of cheap grain, O’Rourke (1997) found thatthe welfare e¤ects of the grain invasion on workers di¤ered between European nations. As does
the present paper, the study of O’Rourke examines two opposing e¤ects of free trade on the real
19

Because there are only two income classes in the economy analyzed below, in the context of the model, the term
‘workers’includes small-scale capitalists, whose major source of income is wages.

11

wage— e¤ects incorporated in the standard rural–urban speci…c-factors model: the decline in thevalue of the wage in terms of manufactured goods and the rise in the value of the wage in terms offood. By utilizing a computable general equilibrium model that has parameters based on empirical data, O’Rourke found that the former negative e¤ect outweighed the latter positive e¤ect inFrance, which had a large agricultural sector, whereas the opposite was true for Britain, which hada small agricultural sector (ibid., 792). By combining these two results, this article asserts thatwithin Western Europe, di¤erences in the sizes of agricultural sectors may have been associatedwith diverging political responses to the grain invasion.
The protection of agricultural sectors continues, as was demonstrated at the World Trade Organization meeting in Mexico in 2003. Coppel and Durand (1999, Figure 1, 20) found evidence ofstationary trends in producer support estimates (PSEs) in OECD countries’ agricultural sectors
between 1986 and 1998. During this period, the PSEs remained at about 40% in the European
Union, at about 20% in the United States, and at about 60% in Japan; these levels are well above
those prevailing in Australia and New Zealand (ibid., 6). In contrast, trade liberalization in manufactured goods has been successful. Findlay and O’Rourke (2001, Table 5, 67) have documented
the declining trend in average tari¤s on manufactured goods for 27 major countries between 1913
and 1998. Intercontinental price gaps between 1950 and 2000 were cut by 76%, of which no lessthan 74% can be attributed to trade liberalization (Lindert and Williamson 2001, Table 1). These
reports suggest that manufacturing sectors contribute most to trade liberalization.

2.4

SummaryThis historical evidence teaches one that a country’s trade policy can vary over time in accordancewith its stage of economic development. A country may even experience an ebb and ‡ow in its
trade policies during the growth process, as is evident from the political backlashes that occurredin 19th-century continental Europe. Another lesson is that the opening of an economy to international trade paves the way to modern growth by alleviating the economy’s resource constraints.
Hence, international trade appears to have a considerable in‡uence on economic growth and living
standards. These important points are con…rmed by the theoretical analysis that follows.
12

3

The Model

Consider a two-sector overlapping-generations economy operating in a two-good world over anin…nite discrete-time horizon. The three factors of production are land, capital, and mobile labor.
An agricultural good is produced in one sector by employing land and labor, and a manufactured
good is produced in the other sector by using physical capital and labor. Economic growth is driven
by capital accumulation, which is a¤ected by trade policies but not by other potential forces suchas population growth, technological progress, and the expansion of land supply.20
The economy may take part in international trade in …nal goods without a¤ecting world markets.
Whereas the world economy does not impose restrictions on trade, the economy under study may
become protectionist. In this event, the government would only use tari¤s for protection, and tari¤levels would be determined endogenously through the internal political process. Tari¤ revenues are
not rebated to individuals but are spent on consumption by the government.

3.1

The Production of Final Goods

The production environments are perfectly competitive, and households rent land, capital, andlabor to producers. Independently of political decisions about trade policies, all agents in themarkets act as price takers who can perfectly predict the future course of the economy. Labor isperfectly mobile between sectors, and inputs are, unlike …nal goods, immobile between countries.
3.1.1

The Agricultural Sector

This sector produces the agricultural good, which is both perishable and indispensable for survival.
Production is based on CES technology. Let Xt and LAt denote the quantities of land and labor
employed by this sector in period t. The output of the agricultural good produced in period t, ytA ,is thenytA = F (Xt ; Lt ) = A[aXt + (1with A > 0; a 2 (0; 1) anda)Lt ]1= ;2 ( 1; 0). The parameter restriction imposed on(1)means that one of

the Inada conditions cannot be satis…ed: that is, the marginal productivity of each input does notremain …nite as the corresponding input approaches zero. As shown subsequently, this property
20

Letting physical capital a¤ect agricultural production would not alter the basic results, provided that the accumulation of aggregate capital caused labor to ‡ow to the manufacturing sector.

13permits complete specialization in manufacturing in the later stages of economic development.21
Producers in period t maximize their pro…ts given pt , the price of the agricultural good,t , therental price per unit of land, and wtA , the wage per unit of labor in period t. For convenience,
the manufactured good is taken as the numeraire. This standard optimization problem is solved
by maximizing pt ytA

wtA Lt with respect to Xt and Lt . Substituting a …xed land supply,t Xt

X > 0, into the resulting inverse demand functions yields
t = pt FX (X; Lt );(2)

wtA = pt FL (X; Lt );where Fi denotes the partial derivative of the function F with respect to argument i. In what
follows, this notation applies to all functions.
3.1.2

The Manufacturing Sector

This sector produces the manufactured good, which can be consumed or stored, based on Cobb–
Douglas technology. Let Kt be the aggregate quantity of capital employed by this sector in periodt. In addition, let the working population in each period be normalized to unity for notational
simplicity. Because there is no unemployment in these competitive environments, the output of the
manufactured good produced in period t, ytM , isytM = M Kt (1where

2 (0; 1), kt

Kt =(1

Lt )1= M kt (1

Lt );

(3)

Lt ), and M > 0 denotes the level of technology. Note that kt is

the ratio of capital to labor employed in the manufacturing sector, not the capital–labor ratio forthe aggregate economy. As in the agricultural sector, producers in period t maximize their pro…ts
given wt , the market wage per unit of labor, and rt , the rental price per unit of physical capital, in
period t. The market price of the manufactured good is normalized to unity. Therefore, the inverse
demand functions are
rt = M kt

1

wt = (1)M ktr(kt );(4)w(kt );

where the rate of return on labor, wt , increases with physical capital. For simplicity, it is assumed
that physical capital depreciates completely after being used.
21

An economy that incorporates Cobb–Douglas technology would not completely specialize in manufacturing evenat such a stage of development. In this case, the central argument of the paper could be maintained, but simplicity
of exposition would be lost.

14

3.1.3The Allocation of Labor

Because of perfect labor mobility, wages are equalized across sectors producing positive amountsof output, as follows.
w(Kt =(1

Lt )) = pt FL (X; Lt )(5)

This implies that the industrial sector is active and that Lt < 1 as long as the economy has apositive amount of physical capital. Because of the bounded marginal productivity of agriculturallabor, by contrast, agricultural production may be zero depending on the amount of physical capital
relative to the amount of land. In other words, there exists a price level, pmintw(Kt )=FL (X; 0);below which the industrial wage remains above the agricultural wage and, hence, no one works inagriculture. It follows that the employment of labor in agriculture is described by a single-valued
function such that, for a given pair (Kt ; pt )
0;
8
< =0
L(Kt ; pt ) = Lt
: 2 (0; 1)

pmin
t ;

if

pt

if

pt > pmint ;(6)where LK ( ) < 0 and Lp ( ) > 0 in the second case (i.e., there is incomplete specialization). The …rst
property implies that a rise in the industrial capital–labor ratio raises the wage rate in industry
and thus causes labor to ‡ow from agriculture. The second property implies that a rise in therelative price increases the marginal productivity of labor and thereby labor demand in agriculture.
In what follows, this paper assumes that the economy has a positive amount of physical capital, sothat the market wage rate equals wt in every period.

3.2

Individuals

A new generation, consisting of a continuum of individuals, is born at the beginning of every period
and lives for two periods. Hence, there are two generations in society at each point in time. The
population size of each generation is normalized to unity. Individuals may di¤er in their initialendowments, but they are homogeneous in all other respects. An individual born in period t isreferred to as a member i 2 [0; 1] of generation t.
3.2.1

The Environment

In the …rst period of life (youth), a member i of generation t does not work and consumes the
agricultural and manufactured good provided by his or her single parent. In addition, he or she
15

may receive a transfer (in the form of the manufactured good) from his or her parent, bit

0, andkeep it for savings. In the second period (adulthood), the individual has a single child and acquires
one unit of labor. By supplying this labor inelastically, the individual receives wage income of wt+1 ,which is the market wage rate at time t + 1 in terms of the manufactured good. Individuals who
have savings earn interest, and those who own land are paid interest by producers. To keep themodel tractable, suppose that there is no market for land in this economy because land is heldby previous generations and inherited by the next generation within dynasties. To summarize, amember i of generation t has a second-period income ofi
It+1= wt+1 + rt+1 bit +i
t+1 x ;

(7)

where rt+1 is the net return on savings under the assumption of complete capital depreciation, andxi denotes the amount of land owned by the individual.
3.2.2

Consumption

As mentioned in the introduction, this paper considers an extreme case of Engel’s Law. In otherwords, individuals spend their incomes exclusively on the agricultural good, which is thought of as
staple food, up to a saturation level of c^ > 0. It follows that the household food consumption of amember i of generation t; isi =pcit+1 = It+1
t+1

iif It+1

cit+1 = c^iif It+1> pt+1 c^;

pt+1 c^;(8)where the …rst expression applies when the food constraint is binding. Any remaining income isallocated between mit+1 , which represents household consumption of the manufactured good, andbit+1 , which represents a transfer of income to the child in the form of the manufactured good. The
allocation is chosen to maximize utility, which is given by
uit = (1where

2 (0; 1) and) ln mit+1 +ln( + bit+1 );(9)> 0: The utility function implies that bequeathing is motivated by the ‘joyof giving’. 22 The budget constraint in this case is given by
i
zt+1

i
It+1

pt+1 c^22

mit+1 + bit+1 ;For simplicity, it is assumed that no one dies regardless of the amount of food consumption. Incorporating death
makes the model more realistic but does not a¤ect the paper’s qualitative results. The qualitative results of the paper
would survive the incorporation of a more realistic utility function, such as 1 ln(ct+1 c^) + 2 ln mt+1 + (112 ) ln bt+1 ; provided that 1 , the weight associated with excess food consumption, is su¢ ciently small.

16

iwhere zt+1
can be interpreted as net income, given that initial food expenditures of pt+1 c^ arerequired. It follows that
mit+1 =

bit+1 =
where

(1

8
< zi

: (1

8
< 0
:

i
zt+1
< ;

if 0

t+1
i
)(zt+1
+ )

i
(zt+1

)

i
if zt+1i
if zt+1<;i
if zt+1;)= > 0. Because of the inclusion of;(10)> 0 in the utility function (9), low-income

households prefer consuming the manufactured good to leaving it to their o¤spring.
3.2.3

Group Structures

In period 0, there are two income groups, R (Rich) and P (Poor), which respectively comprise the…xed fractions

2 (0; 1) and 1of adult individuals. Land and capital are distributed equally

within group R; whereas group P is proletarian. Because there is no within-group heterogeneity,
descendants can be fully identi…ed by i = P; R in each period.
Linear homogeneity of the production functions implies that the allocation of aggregate income
is given by
yt = ItR + (1)ItP :(11)

From (7) and (10), it follows that
ItR > ItP

and

bR
t

bPt

for all t

0:

(12)

P
This is satis…ed with equality only if bR
t = bt = 0: The strict inequality in the expression for income,

ItR > ItP , results from permanent inequality in the ownership of land and the monotonicity of the
returns on savings. Equation (12) implies that the initial ranking of wealth among individuals persists into the future. This between-group inequality is plausible, given the historical evidence, andenables an examination of the e¤ects of international trade on individuals whose living standards
di¤er.

4

Equilibrium

This section analyzes the determination of the competitive market equilibrium in each period.
17

4.1

Aggregate Capital and Output

In the absence of opportunities for international lending and borrowing, aggregate savings form
aggregate capital in the subsequent period. Hence,
Kt+1 = bR
t + (1

)bPt

Bt ;

(13)

where Bt denotes aggregate transfers in period t. Note that the savings of group R are indispensablefor the formation of physical capital.
Given (1), (3) and (13), aggregate output is expressed as
yt+1 = pt+1 F (X; Lt+1 ) + M Bt (1

Lt+1 )1y(Bt ; pt+1 );(14)

where Lt+1 = arg max yt+1 because of perfect labor mobility. It follows that yB ( ) = Rt+1 > 0
Aprovided that the manufacturing sector is operative in period t + 1: In addition, yp ( ) = yt+10,which implies that a rise in the relative price of the agricultural good increases its value.
Given (6), the industrial capital–labor ratio is
kt+1 =
where (Bt ; pt+1 )1

Bt
L(Bt ; pt+1 )k(Bt ; pt+1 ) > 0;

(15)

0: Wage equalization (5) implies that k(Bt ; pt+1 ) is a single-valued function

such thatkB ( ) > 0;lim k( ) = 1;

Bt !1

kp ( )

0;(16)

where the last inequality is strict because of incomplete specialization in period t+1. The economic
intuition behind these properties is worth emphasizing. First, a rise in aggregate transfers, Bt ,increases the capital–labor ratio in industry kt+1 by raising aggregate savings. Second, kp ( ) is
positive because a rise in the relative price of food improves the marginal productivity of agriculturallabor and thereby attracts more workers to the agricultural sector.

4.2

The Political System

Let vti be the indirect utility of a member i of generation t: It follows from (8) and (10) that
8i>>
I i =pif zt+1< 0;>< t+1 t+1
i
i
(17)
vti =
(1
) ln zt+1
if 0 zt+1< ;>>>: ln(z i + ) + " if z i
;
t+1

t+1

18

where "and(1) ln(1)+i , includes the factor prices w
ln : In (7), income, It+1
t+1 ; rt+1 ,

t+1 , which are, as explained in Section 3.1, completely determined by the capital–labor ratio,

kt+1 , and the relative price, pt+1 . Hence, given (15), and noting that bR
t = [Bt(1)bPt ]= ; itfollows thati
It+1
= I(kt+1 ; bit ; pt+1 ; xi )i
zt+1
= I i (Bt ; bPt ; pt+1 )I i (Bt ; bPt ; pt+1 );pt+1 c^(18)z i (Bt ; bPt ; pt+1 ):Suppose that the economy has a comparative advantage in manufacturing in international
markets, in which the relative price of food is constant at pw > 0. Then, the domestic pricefalls to a level that is on the interval [pw ; pct+1 ]pt+1 ; depending on the tari¤ level levied by thehome country. It follows that the preferred price for a member i of generation t (working in periodt + 1) is8< arg max(I i =pt+1 )
t+1
pit+1 =: arg max z i
t+1

90; 8pt+1 2 pt+1 =;otherwiseiif zt+1

pi (Bt ; bPt );

(19)

i
i
where It+1
and zt+1
are given by (18). This implies that the individual’s preferred (optimal) trade

policy depends on his or her living standards. This is because the individual’s consumption bundleis larger the higher is individual income.
Consider a political system in which only young individuals (with perfect foresight) whose living
standards exceed some threshold have the franchise. Suppose also that majority voting determines
the trade policy that is implemented when they are adults. Because young individuals do notsupply labor, their living standards are completely dependent on their respective parents’incomes.
For simplicity, suppose that a young individual has voting rights if and only if his or her parent
earns enough to purchase the manufactured good as well as food. It follows from (12) that group
R has voting rights as long as the industrial sector is in operation.
This framework implies that one of two political regimes emerges during the process of economic
development. Under Regime I, the food constraint is binding for group P and, thus, politicaldecisions are made by group R: Under Regime II, su¢ cient capital has accumulated to raise theincome level of group P , and this enables their political participation. Formally,

pt+1 =

8
< pR

t+1

: pP

t+1

if ztP

0 (Regime I);

otherwise (Regime II).
19

(20)

4.3

The Dynamical System

It follows from (10), (11), and (12) that the evolution of aggregate transfers and of intergenerationaltransfers within group P is given by

Bt+1 =

8<:max[yt+1
(yt+1

P
)It+1

(1

pt+1 c^(pt+1 c^ + ); 0]P
if zt+1
P >if zt+1)(Bt ; bPt ; pt+1 );bPt+1 =Pmax(zt+1

9
=
;

(21)

(Bt ; bPt ; pt+1 );; 0)

P , and z P
where yt+1 ; It+1
t+1 are given by (14) and (18).

Suppose that the economy begins operating under an agrarian, closed system in which much of
the labor force is absorbed by agriculture. Suppose also that underprivileged workers cannot a¤ord
to buy enough food. To be precise, agricultural employment in period 0, L0 = L, clears the foodmarket so that
F (X; L) = c^ + (1)FL (X; L) < c^;

L 2 (1

; 1);

(A1)

for which (1), (2), and (8) have been used. This condition holds when the saturation level offood consumption, c^ , is su¢ ciently large, and when the amount of land, X , and the fraction of
landowners, , are su¢ ciently small.23 The remaining labor, 1

L, is employed in the productionof the manufactured good, which is consumed by group R. This means that young members ofgroup P have no voting rights and inherit nothing. Given (11), (A1), and (21), the initial transfersare
B0 =where k0 = K0 =(1max[M k0 (1

L)

; 0];

bP0 = 0:(22)L) and the initial capital stock, K0 , is historically given.

Because the path of intergenerational transfers, fBt ; bPt g1
t=0 ; determines all the economic variables in each period, equations (19), (20), (21), and (22) reveal that the evolution of the economy
under each regime is governed by a two-dimensional, …rst-order, autonomous dynamical system for
Bt and bPt :23

The inequality in (A1) holds for a su¢ ciently large value of c^. This is because FL (X; L) decreases with c^.
Moreover, the properties of F ( ) ensure that 1< L < 1 if X and are su¢ ciently small. On the one hand,limX!0 L = 1 because limX!0 F (X; Lt ) = limX!0 FL (X; Lt ) = 0: On the other hand, lim !0 L < 1 because
F (X; 1) > FL (X; 1):20

Figure 3 depicts this dynamical system conditional on the stationarity of the world price pw :The BB and bb loci are de…ned as the sets of all pairs (Bt ; bPt ) for which Bt = (Bt ; bPt ; pw ) andbPt =(Bt ; bPt ; pw ); respectively. As was established in (12), there is no reversal of the initialranking of wealth across dynasties. Hence, the transfer to group P is below average and, thus, thepair (Bt ; bPt ) does not cross the 45 line.

5

Trade Policy in the Growth ProcessThis section analyzes the evolution of a land-scarce economy and the associated ebb and ‡owof protectionism re‡ecting gradual changes in individual trade-policy preferences and extensionsof the franchise. It is shown that although the economy eventually liberalizes foreign trade, it
may go through a stage of protectionism between two surges of liberalism. As shown below, thisnonmonotonic transition of trade policies is consistent with the experience of 19th-century Western
Europe.
Each of Regimes I and II encompasses two phases of trade policy. Regime I-A is an underdeveloped stage that is characterized by protectionism and political con‡ict. The landless classcan only a¤ord staple food and, thus, individuals from this class support liberal policies. These
policies enable imports of inexpensive foodstu¤s. However, because working class people are notsu¢ ciently wealthy to have voting rights, political decisions are made by landowners, who support
the anti-industrial, protectionist policies that protect their gains from owning land.
Trade liberalization takes place and class con‡ict dissipates under Regime I-B. The accumulated
capital stock raises the relative importance of capital in landowners’portfolios and thereby inducesthem to vote for proindustrial, liberal policies. Hence, despite the fact that landless workers have no
voting rights, the economy opens up to international trade, which provides workers with inexpensive foodstu¤s. Although the landless cannot a¤ord manufactured goods, their food consumption
increases during the industrialization process.
Regime II-A is a semideveloped stage in which there could be a resurgence of protectionism.
Now that su¢ ciently high wages allow all members of the economy to consume the manufactured
good as well as staple food (i.e., the food constraint is not binding), individuals take into accountthe e¤ects of free trade on the consumption of both goods. As a result, proindustrial policies may
not bene…t everyone, because the shift of labor into the manufacturing sector reduces that sector’s
21

labor productivity. In turn, this reduces the wage rate in terms of the manufactured good. These
increasingly enfranchised workers develop political in‡uence and, thus, the economy may return toprotectionism, as did 19th-century Germany and France.
Under Regime II-B, the economy has reached a highly developed stage that features establishedliberalism and an absence of political con‡ict. In this stage, the landless not only consume the
manufactured good but also leave capital to their o¤spring. Hence, the interest rate becomes anadditional factor through which trade policy a¤ects their incomes. The negative e¤ect of protectionist policies on the savings rate counteracts the accompanying positive e¤ect on wages (in termsof the manufactured good). For this reason, individuals with su¢ cient capital prefer free trade
because it maximizes their incomes.

5.1

Regime I: Dominance of the Landed Class

Under this monolithic regime, both political power and economic resources are in the hands ofthose who own land, whereas other members of society have no voting rights and spend all theirwages on consuming food. In this case, the domestic price level solely re‡ects landlords’preferences;i.e., pt+1 = pR
t+1 : Living standards among the poor do not improve until the economy opens up tointernational trade.
5.1.1

The Trade Policy Preferences of Group R

Under Regime I, the food constraint is binding for members of group P . It then follows from (7)and (10) that members of this group transfer nothing to their o¤spring, who become wage earners.
Hence noting (11), the preferred price for a member of group R working in period t + 1 is,RpR
t+1 = arg max zt+1 = [yt+1(1where yt+1 = y(Bt ; pt+1 ) and wt+1 = w(k(Bt ; pt+1 )))wt+1

pt+1 c^];!(Bt ; pt+1 ). Noting that @yt+1 =@pt+1 =A ; the objective function, z R , exhibits convexity if the wage rate, w
yt+1
t+1 , is concave with respectt+1

to the relative price, pt+1 : For simplicity, the following analysis assumes convexity of the wage rate,
in which case, landlords make a bilateral choice between free trade and autarky.24
Let pct denote the autarkic price in period t: Then, wage equalization (5) implies that pct =w(Bt =(124L))=FL (X; L) under Regime I. This implies that L(Bt ; pct ) = L for any Bt > 0. As

Lemma 8 in the Appendix shows that if

is su¢ ciently small, @ 2 wt =(@pt )2 < 0; 8pt > pmin :22

shown below, L is the unique autarkic agricultural employment level under Regime I.
Lemma 1 If (A1) is satis…ed and group R owns all capital, L is the unique employment level thatclears the goods markets under autarky in period t

0:

Proof. See the Appendix.
It follows from (11), (17), and (A1) that a landlord (who owns capital) chooses between free
trade and autarky according tosign(vtR;wnM;w
vtR;c ) = sign [yt+1

M;c
A;w
yt+1
] + [pw yt+1

(1

w
)wt+1

o
pw c^] ;(23)

where the superscripts w and c are, respectively, used to denote variables under free trade, (pt+1 =pw ), and variables under autarky, (pt+1 = pct+1 ), conditional on bPt = 0: If one views landlords as
the owners of all domestic …rms, the …rst and second terms in the square brackets of the above
expression indicate landlord gains and losses, respectively, from specialization in manufacturing.
These opposing e¤ects re‡ect a trade-o¤ between the two assets— capital and land— in landlords’
portfolios, and as shown below, their overall e¤ect depends on the amount of capital relative to
land.
The gain from industrial specialization that results from trade liberalization satis…es the relationship
M;w
yt+1

M;c
w
> wt+1(L
yt+1Lwt+1 );(24)

which shows that there is diminishing marginal productivity of labor in manufacturing. Specialization causes the inegalitarian equilibrium (A1) to break down. This means that the value ofagricultural output is insu¢ cient to cover payments to workers, (1w , and landlords’food)wt+1

consumption, pw c^.
Clearly, trade liberalization bene…ts group R if it leads to a substantial shift of labor fromagriculture to industry. This occurs in a land-scarce, capital abundant economy that needs a large
labor force for food production under autarky and that would specialize in manufacturing underfree trade.25 Landlords in such an economy would use more capital and less land to maximize theirincomes. Conversely, they support anti-industrial policies when there is insu¢ cient capital.
25

Complementarity between capital and labor in manufacturing plays an important role by allowing capital accumulation to improve marginal labor productivity and thereby increase industrial employment under free trade.

23

Let B be the critical value of Bt for which the autarkic price, pct+1 , equals the world price, pw .
Because pct+1 strictly increases monotonically with Bt , it follows that pct+1 > pw for Bt > B. The
following lemma states that landlords reverse their trade policy preferences in an economy that has
a comparative advantage in manufacturing.
Lemma 2 If (A1) are satis…ed and group R owns all capital, (1) vtR;w < vtR;c for a su¢ ciently
large Bt ; and (2) vtR;w > vtR;c for Bt = B + "; where " > 0 is a su¢ ciently small value.
Proof. See the Appendix.
The transition in landlords’ trade policy preferences is illustrated by Figure 4. The focus ison aggregate transfers on the interval (B; 1), where the economy has a comparative advantage in~ is de…ned as the critical level above which landlords
manufacturing. The aggregate transfer, B,~ is guaranteed by Lemma 2. Landlords
prefer proindustrial liberal policy, and the existence of B
~ where the economy has relatively little
support anti-industrial protective policies for Bt 2 (B; B);
capital.26
5.1.2

Regime I-A: Opposition to Free Trade

Under Regime I-A (0tt~), the landed interests resist trade liberalization in order to protect

their income sources in agriculture. Political con‡icts arise between these protectionist landowners
and workers, who bene…t from free trade.
The Evolution of the Economy Consider an economy that initially has relatively scarce capital
but a comparative advantage in manufacturing. In other words, the initial transfer, B0 in (22), isin the neighborhood of B and satis…es~
B < B0 < B:

(A2)

Recall also that young members of group P receive no transfers in period 0; i.e., bP0 = 0.
Equations (10) and (20) imply that the political state in period t is Regime I if Bt > bPt = 0:
Thus, Lemma 2 implies that27c
pt+1 = pR
t+1 = pt+1

~ and bP = 0:
for Bt 2 [B; B]
t

26

(25)

For simplicity, the …gure depicts the situation in which there is a one-o¤ reversal of trade policy preferences. It
is assumed that if this is not the case, landlords continue to support anti-industrial, protective policies as long as Bt~
falls into the interval (B; B):
27
It is assumed that landowners support autarkic policy when they are indi¤erent.

24

It follows that the government in period t + 1 implements the autarkic policy, which leads to theinegalitarian equilibrium (A1) and thereby to mPt+1 = bPt+1 = 0. Therefore, political dominance byanti-industrial landlords persists in the early stages of development when Bt~
B:

Under these circumstances, intergenerational transfers are accumulated only by the rich. Equations (21) and (A1) reveal that the evolution of aggregate transfers is
Bt+1 = (Bt ; 0; pct+1 ) = [M Bt (1

L)1

];

(26)

~ B]
^ and bPt = 0: This shows the monotonicity of, and decreasing returns to scale
for Bt 2 [B;associated with, capital accumulation. The high employment level in agriculture, L; generates
a low wage rate, wt+1 =pct+1 = FL (X; L); which impedes political participation by landless wage
~ to alter their trade-policy preferences.
workers. Wages do not rise until Bt rises above B^ be the level
It is necessary to de…ne three critical values of aggregate transfers. First, let B^ pw )) = c^:above which free trade releases wage workers from the food constraint; i.e., FL (X; L(B;
Second, let B be the level above which wage workers bequeath to their o¤spring; i.e., !(B ; pt+1 ) =pt+1 c^ + , where pt+1 is given by (30) below. Third, let B 0 denote the level above which the freetrade policy leads to complete specialization in manufacturing; i.e., !(B 0 ; pw ) = pw FL (X; 0).28 In
order to exclude some potential scenarios that are beyond the scope of this paper, it is assumedthat~ < B;^B

B < B0:(A3)

The …rst condition ensures that the food constraint is binding for group P in the …rst period of
trade liberalization. The second condition ensures that complete specialization occurs only in fairly^ < B :29 Thus, it follows from Assumptions
advanced states of development. This implies that B(A2) and (A3) that, as depicted by Figure 3,~<B^ < B < B0:
B < B0 < B(27)

To ensure that the economy goes through the all stages of trade policy, it is assumed that the28~<B^ holds if c^ is su¢ ciently large. The condition B < B 0 holds if the parameter a 2 (0; 1) in
The condition B
the agricultural production function (1), which represents the weight attached to land, is su¢ ciently large; note that
FL (X; 0) = A(1 a)1= :29^ < B holds because the condition B < B 0 implies wage equalization of the form
The relationship B
FL (X; L(B ; pt+1 )) = c~ + =pt+1 ; where Lt+1 = L(Bt ; pt+1 ) decreases with Bt and increases with pt+1 :25

manufacturing technology, M , is productive enough to satisfy30
Bt < [ M Bt (1L)1]for Bt = B; B 0 :(A4)This condition permits aggregate transfers to grow monotonically under autarky and ultimately to~ an event that changes landlords’trade preferences. The last period of
exceed the critical level B—
Regime I-A, t~; is the period in which the critical level is exceeded for the …rst time; i.e., Bt

~ for
B

~ for t = t~. Note that between-group income inequality expands under autarky.
t 2 [0; t~) and Bt > B
This is because the living standards of group P do not improve despite the growth in aggregate
output, yt .

Political Con‡icts

The …rst phase of Regime I is characterized by political con‡ict between thetwo income classes— groups R and P disagree on trade policy. Trade liberalization bene…ts themembers of group P , who care only about food consumption, because specialization in manufacturing boosts the wage rate in terms of the agricultural good, FL (X; Lt ). Despite the desirabilityof free trade for group P , the economy remains closed under Regime I-A to enable landlords tosecure their gains from agriculture. Proposition 1 below summarizes the discussion.
c
Proposition 1 Under (A1)-(A4); there is between-group con‡ict over trade policy (i.e., pRt = pt >pw = pPt ) for t 2 [0; t~].
The Failure of Liberalization and the Poverty Trap

~ is the critical level for
Note that B

free trade and industrialization to take o¤. However, the economy may stagnate under Regime~ depending on the availability of land. This is because the level of X
II-A without reaching B;
is an important determinant of the timing of the shift in landlords’ trade-policy preferences. A
rise in X reduces the autarkic employment level, L in (A1), and thus lowers landlords’gains fromindustrial specialization. In this case, a large amount of capital is necessary for landlords to support
a proindustrial, antiagricultural policy. As a result, the take-o¤ condition (A4) is not satis…ed andthe economy remains autarkic and inegalitarian.31 This result indicates that there may be income^ and B 0 approach zero as M becomes
The condition (A4) holds if M is su¢ ciently large, noting that both B
in…nite.
31
If X is su¢ ciently high, the economy converges to a steady-state equilibrium in which it has a comparativeadvantage in agriculture. This case is not discussed in this paper.
30

26

di¤erences over time between countries that have comparative advantages in manufacturing.32
5.1.3

Regime I-B: The First Period of Globalization~ for the …rst time in period t~; the economy enters Regime I-B
When aggregate transfers exceed B(t~ < tt^), under which free trade, led by the landed class, is a feature. Although free trade

bene…ts the members of group P , the political power is still wielded by group R; who own all thecapital.

The Evolution of the Economy As shown by Lemma 2 and Figure 4, landlords prefer proin~ Thus, it follows from (20) that
dustrial liberal policies when aggregate transfers exceed B:w
pt+1 = pR
t+1 = p~ and bPt = 0:
for Bt > B(28)

This means that the government in period t + 1 implements free trade, which breaks down the^ the food constraint
inegalitarian, autarkic equilibrium (A1). Nevertheless, as long as Bt is below B;
remains binding for group P (i.e., ztP = wt+1

pt+10) and, thus, mPt+1 = bPt+1 = 0:

Under these circumstances, intergenerational transfers are accumulated only by the rich. Equation (21) shows that the evolution of aggregate transfers is
Bt+1 = (Bt ; 0; pw ) = [yt+1

(1

)wt+1

(pw c^ + )];

(29)

~ B]
^ and bPt = 0; where yt+1 = y(Bt ; pw ) and wt+1 = !(Bt ; pw ). The resulting growthfor Bt 2 (B;path of aggregate transfers is above that of autarky because, as depicted by Figure 4, free trade
generates higher incomes for members of group R; who own all the capital. Therefore, underassumption (A4) free trade permits aggregate transfers to grow monotonically and ultimately to^ an event that triggers political participation by members of group P . The …nal period
exceed B—
of Regime I-B, t^; is the period in which the critical level is exceeded for the …rst time; i.e., Bt^
B^ for t = t^.
for t 2 [0; t^) and Bt > B
Note that capital accumulation under free trade causes labor to shift from agriculture to industry, thereby increasing food consumption, cPt = FL (X; Lt )c^. Thus, unlike before, the living

standards of those in group P improve under Regime I-B, and, ultimately, the food constraint does32

This is in line with the work of Galor et al. (2002), who landlords’ opposition to industrialization in a closed
economy.

27

not bind. Figure 5 depicts the evolution of the agricultural sector when
Noting that 1=(1is su¢ ciently small.

) is the elasticity of substitution between land and labor, the agricultural

production function (1) exhibits quasi-Leontief properties: marginal labor productivity, FL (X; Lt ),is constant, except when employment is around X, above which it is very low. In these circumstances, Lt decreases monotonically toward X under Regime I-B and eventually falls below X inperiod t^ + 1:

Political Con‡ict

In the second phase of Regime I, class con‡ict dissipates: the two income

groups agree on trade policy, even though the franchise is limited to group R: Opening up tointernational trade leads to a reduction in agricultural employment, which leads to a collapse of theinegalitarian equilibrium (A1), in which the living standards of the masses are low. The resultant
improvement in the wage in terms of food, FL (X; Lt ); bene…ts the members of group P , who care
only about food consumption until (and including) period t^. For this reason, the liberal policy
pursued under Regime I-B bene…ts the members of both groups P and R. The discussion issummarized below.
Proposition 2 Under (A1)-(A4); there is no political con‡ict, and free trade is preferred by allP~^
individuals (i.e., pw = pRt = pt ) for t 2 (t; t].

5.2

Regime II: The Rise of the Working Class

Regime II is characterized by the political participation of members of group P , on whom the foodconstraint is no longer binding. The landless group, P , becomes the major political power, and thedomestic price level fully re‡ects its preferences; i.e., pt+1 = pPt+1 :5.2.1

The Trade Policy Preferences of Group P

Equations (19) and (20) show that a landless member of generation t prefers a price ofP
pPt+1 = arg max zt+1
= [!(Bt ; pt+1 ) + (Bt ; pt+1 )bPt

P
where zt+1

P
It+1

pt+1 c^];(30)

pt+1 c^: This expression incorporates two opposing e¤ects of trade protection on

the members of group P; who now consume the manufactured good as well as staple food. On the
one hand, trade protection improves the purchasing power of the manufactured good by raising the28

wage rate, wt+1 . On the other hand, it reduces the interest rate, rt+1 , and lowers the cost of foodconsumption, pt+1 c^:
Because the labor allocation does not change when complete specialization develops, it is clear
P =@pthat @It+1
t+1 = 0 for pt+1

pmin
t+1 . By contrast, (4), (5), and (15) imply that, under incomplete

specialization,
P@It+1=@pt+1 =where pt+1 > pmin
t+1 andt+1 FL (X; Lt+1 )[1(1

Lt+1 )bPt =Bt ];(31)

t+1 2 (0; 1) denotes the elasticity of the wage rate, wt+1 , with respect

to price. The members of group P oppose the free trade policy (i.e., pPt+1 > pw ) provided that
P =@p
@It+1
^ for pt+1 = pw . As shown below, their preferred price depends on the wage
t+1 > celasticity and their capital share.
First, consider the case in which bPt = 0 and members of group P have no capital income.
It follows from (31) that pPt+1 > pw if, under free trade, (1) specialization is incomplete (i.e.,w
pw > pmin^), and (3) the waget+1 ), (2) the food constraint is not binding (i.e., FL (X; L(Bt ; p )) > celasticity,

t+1 , is su¢ ciently high. In fact, the last condition is satis…ed if the wage rate in termsof food, FL ( ); is inelastic with respect to Lt+1 .33 Given these properties of the wage, the adversee¤ect of trade protection on food consumption is mitigated and, hence, wage earners are induced
to vote for a protectionist policy that balances the consumption of these goods, and against free
trade, which minimizes the unit cost of food.
These outcomes are illustrated by Figure 5, in which the agricultural production function incorporates a su¢ ciently small(i.e., a low elasticity of substitution between land and labor). Observethat labor productivity, FL (X; Lt ), is constant unless the land–labor ratio is close to unity. Moreover, labor productivity exceeds c^ and the food constraint is not binding, with Lt being su¢ ciently
smaller than X: Therefore, conditions (1)–(3) above are satis…ed if agricultural employment under^ and B in (A3), thefree trade, L(Bt ; pw ); is positive but not too high. Given the de…nitions of B
preceding analysis can be used to establish the following lemma.
Lemma 3 If (A1)-(A4) are satis…ed whenis su¢ ciently small, members of group P oppose free

^ B ) and bPt = 0:
trade (i.e., pPt+1 > pw ) for Bt 2 (B;Note that under the assumptions of Lemma 3, wage earners are more likely to prefer free trade33

Equation (35) in the Appendix shows thatt ! 1 and

29

t ! 1

as

!

1, provided that X=Lt > 1:

when land is scarce.34 This indicates that an abundance of land is a unique determinant of the
trade policies pursued under Regime II.
Second, consider the case in which bPt > 0 and the members of group P have capital income, inwhich case, the wage elasticity matters less to them. It follows from (31) that they would prefer free
trade if the ratio bPt =Bt , which is a measure of between-group equality, were su¢ ciently large andclose to unity.35 The intuition behind this result is straightforward. Wealth equality diminishes
between-group heterogeneity and thereby induces all individuals to maximize their average net
incomes, (yt+1

pt+1 c^) in (11), when the food constraint is not binding. Pursuing free trade is thebest way of meeting that objective because, as (14) implies,
pw = arg max[y(Bt ; pt+1 )pt+1 c^];(32)^ However, because the food constraint is binding on the members of group P; they
where Bt > B.
support free trade to maximize their food consumption. The following lemma summarizes this
discussion.
Lemma 4 If (A1)-(A4) are satis…ed and bPt =Bt is close to unity, the members of group P support
free trade; i.e., pPt+1 = pw :5.2.2

Regime II-A: Political Backlash

As a result of industrialization under free trade, the wage rate exceeds average food expenditure,pw c^, and the economy enters Regime II-A (t^ < tt ). Workers’ growing demands for the man-ufactured good may trigger a resurgence of protectionism in agriculture because workers are not
wealthy enough to make transfers to their o¤spring.
The Evolution of the Economy Recall that B is the minimum level of aggregate transfers
above which workers bequeath to their o¤spring; that is, !(B ; pt+1 ) = pt+1 c~ + . Given the^ and B ; the wage rate, wt+1 , is high enoughproperties of !(Bt ; pt+1 ); as long as Bt is between B
for wage workers to purchase the manufactured good for consumption but not high enough to34

This is explained as follows. Given (5), it follows that @Lt+1 =@X > 0, FLX (X; Lt+1 ) > 0 and, thus,@(X=Lt+1 )=@X > 0 for a given pair (Bt ; pt+1 ): Then, (35) in the Appendix shows that the wage elasticity, t+1 ,increases with X.
35
A
Given that linear homogeneity of the agricultural production function implies that FL (X; Lt )Lt < yt+1
; a su¢ P
Aciently large value of bt =Bt makes the right-hand side of (31) less than yt+1 , which represents agricultural output,
and thereby less than c^, which denotes aggregate food consumption.

30

make transfers to their o¤spring. Hence, members of group P earn nothing but wage income whenaggregate transfers are in this interval.
Under these circumstances, intergenerational transfers are accumulated only by the rich. Equation (21) indicates that the evolution of aggregate transfers is
Bt+1 = (Bt ; 0; pt+1 ) = [yt+1

(1

)wt+1

(pt+1 c^ + )];(33)^ B ] and bPt = 0, where yt+1 = y(Bt ; pt+1 ); wt+1 = !(Bt ; pt+1 ); and pt+1 = pP
for Bt 2 (B;t+1
are given in (30). Given that the wage income of an adult individual, wt+1 ; is greater than his
or her food expenditure, pt+1 c^, group R’s total expenditure on the manufactured good, [yt+1
(1

)wt+1

pt+1 c^], exceeds its capital income,M : In addition, such high wage rates imply
yt+1

that agricultural employment, Lt+1 , is below the autarkic level, L. Therefore, Assumption (A4)
implies that aggregate transfers grow monotonically to reach, then ultimately exceed, the criticallevel B — an event that triggers intergenerational transfers within group P . The last period ofRegime II-A, t ; is the period in which this critical level is exceeded for the …rst time; i.e., Bt

B

for t 2 [0; t ) and Bt > B for t = t . Given that there is capital accumulation under Regime II-A,
and given Lemma 3, the following proposition can be established.
Proposition 3 If (A1)-(A4) are satis…ed for a su¢ ciently small , the economy adopts a protectionist policy (i.e., pt > pw ) for t 2 (t^; t ]:As shown in Figure 5, agricultural employment under Regime II-A remains below X and, hence,
the wage rate in terms of food, FL ( ); exceeds c^: Because the wage rate is inelastic, the landless wage
workers prefer a protectionist policy that balances the consumption of these goods to free trade,which minimizes food expenditure. Their political in‡uence, in addition to capital accumulation,
improves their living standards over time.
Recall that wage workers in land-scarce economies are more likely to prefer free trade, as
mentioned in relation to Lemma 3. Hence, the theory developed in this paper suggests that trade
policies may di¤er between economies under Regime II-A: Moderately land-scarce economies tend
to be protectionist, whereas severely land-scarce economies maintain their liberalism. This result is
consistent with O’Rourke’s (1997) explanation of the di¤erence in trade policies between Englandand France in the late 19th century.
31

Political Con‡ict Regime II-A is characterized by the possibility of the revival of class con‡ict.
i
As shown by (32), the no-tari¤ price level, pw , maximizes the aggregate value of It+1

pt+1 c^, which

can be interpreted as net income in the sense that each adult individual exclusively spends pt+1 c^ onfood consumption. Given that his or her indirect utility, represented by (17), strictly increases with
net income, it follows that free trade policy is preferred by at least one group. This fact, along with
Proposition 3, leads to the following proposition.
Proposition 4 If (A1)-(A4) are satis…ed andis su¢ ciently small, there are between-group con-w^
‡icts(i.e., pt = pPt > pRt = p ) for t 2 (t; t ]:Note that in Proposition 4, it is landowners rather than workers who support the free trade
policy. This is because these homogeneous landlords are best interpreted as capitalists whose
dominant income source is capital. Given a more general distribution of land ownership, landlordswith extremely large land holdings would not necessarily favor free trade.
5.2.3

Regime II-B: The Second Period of Globalization

Aggregate transfers exceed B in period t and, accordingly, the economy enters Regime II-B
(t > t ), in which a chain of intergenerational transfers emerges within group P . All individuals
derive capital revenue and earn wages. This implies that the interest rate emerges as an additional
P . The adverse e¤ect of an increase
factor through which the relative price, pt+1 , a¤ects income, It+1

in pt+1 on the interest rate, Rt+1 , counteracts its positive e¤ect on the wage rate, wt+1 , whichcauses the economy to adopt liberalism as it develops.
Conditional Dynamics

For analytical purposes, …rst consider the evolution of transfers underfree trade as a benchmark. Given the properties of !(Bt ; pt+1 ); as long as Bt exceeds B ; the wage
rate, wt+1 , is su¢ ciently high for the members of group P not only to consume the manufactured
good but also to make transfers to their o¤spring. Hence, it follows from (21) that the conditional
dynamical system for Bt > B and bPt

0 is

Bt+1 = (Bt ; bPt ; pw ) = [y(Bt ; pw )pw c^bPt+1 = (Bt ; bPt ; pw ) = (wt+1 + Rt+1 bPt
whereb ( ) = 0; wt+1 = !(Bt ; pt+1 ), and Rt+1 =

];
pw c^

(34)
);

(Bt ; pt+1 ): Because aggregate wage income, wt+1 ,exceeds aggregate food expenditure, pw c^; aggregate net income, yt+1
32

pw c^ , exceeds aggregateM : Hence, given Assumption (A4), aggregate transfers grow monotonically andcapital income, yt+1

ultimately exceed B 0 — an event that triggers complete specialization in manufacturing. Thus, inthe long-run, landlords lose their rents and all individuals have the same income sources, wages andsavings. This result indicates that an egalitarian steady-state equilibrium exists, as the following
lemma states.
Lemma 5 If (A1)-(A4) are satis…ed, the conditional dynamical system (34) has a unique steadystate equilibrium, B = bP :Proof. Equations (34) and (A4) yield a unique, locally stable, steady-state level of aggregatetransfers of B = [y(B; pw ) pw c^by kk(B; pw ); it follows that] > max(B ; B 0 ): By denoting the associated capital–labor ratioPw
B (B; bt ; p ) =level of transfers of bP = [w(k) + R(k)bP

R(k) < 1 and, thus, there is a unique steady-statepw c^] > 0. In the steady-state equilibrium (B; bP ),complete specialization in manufacturing yields aggregate output of y(B; pw ) = w(k) + R(k)B.
This implies that B = bP :^ free trade maximizes the aggregate conAs (32) implies, given aggregate transfers of Bt > B;
sumption of food, aggregate consumption of the manufactured good, and aggregate transfers. Thatis, free trade is Pareto optimal, which is intuitive for an economy with a comparative advantage
in manufacturing. However, from the microeconomic point of view, free trade may not be desirable for the members of group P ; this depends on their capital shares, as explained in Section
5.2.1. Nevertheless, the next lemma ensures that intergenerational transfers within group P growmonotonically.
Lemma 6 If (A1)-(A4) are satis…ed,(Bt ; bPt ; pw ) > bPt for Bt > B and bPt 2 [0; bP ):Proof. See the Appendix.
Thus, free trade after period t generates monotonic growth in bPt , although it is not necessarily desirable for members of group P: Figure 3 represents the conditional dynamical system (34)graphically. The BB and bb loci are de…ned as the set of (Bt ; bPt ) for which Bt = (Bt ; bPt ; pw ) andbPt = (Bt ; bPt ; pw ); respectively. Given the results above, the BB locus is vertical at Bt = B andhas a unique intersection with the parabola-shaped bb locus at point (B; bP ). The diagram showsthat choosing a free trade policy in Regime II-B results in monotonic growth of the pair (Bt ; bPt ),33

which approaches the symmetric steady-state equilibrium, (B; bP ). Hence, the following lemma canbe stated.
Lemma 7 If (A1)-(A4) are satis…ed, free-trade economies under Regime II-B converge to theegalitarian steady-state equilibrium given by B = bP :Note that on the transition path, aggregate output, yt , industrial output, ytM , and the capital–
labor ratio, kt , monotonically grow, whereas agricultural output, ytA , monotonically declines—
eventually to zero.

Unconditional Dynamics

It is now time to consider the endogenous determination of trade

policy. As shown below, aggregate transfers remain su¢ ciently large after period t and, thus,
members of group P retain political control over trade policy.
Proposition 5 If (A1)-(A4) are satis…ed, the economy converges to the free trade, egalitarian,steady-state equilibrium (B; bP ; pw ).
Proof. Assumption (A4) and equation (32) ensure that Bt remains in the interval (B ; B) under
Regime II-B. Given that, as shown by (30), the prevailing price level is preferred by members ofgroup P; equation (12) and Lemma 6 indicate that bPt almost reaches Bt in the long run. Thus, itfollows from Lemma 4 that the economy ultimately liberalizes foreign trade. Lemma 7 states thisresult.
Hence, the economy liberalizes foreign trade in the long run despite the possibility of a politicalbacklash under Regime II-A. After the second phase of trade liberalization, which is permanent,
occurs, aggregate output, yt , industrial output, ytM , and the capital–labor ratio, kt , monotonicallyincrease, as described by the conditional dynamics. Note that there is necessarily complete specialization in manufacturing in the egalitarian steady-state equilibrium, in which all individual incomescomprise wages and capital revenues.

Political Con‡ict

Because the economy converges to the egalitarian steady-state equilibrium,

the theory developed in this paper implies that between-group heterogeneity and class con‡ict
dissipate in the long run.
34

Proposition 6 If (A1)-(A4) are satis…ed, there is no class con‡ict, and free trade policy is supported by everyone in the long run.
Proof. As the proof of Proposition 5 shows, the economy completely specializes in manufacturing
under free trade in the long run. In this case, landlords have no rents and, hence, equation (31),w
RP
which relates to group R, can be used to show that pR
t+1 = p , noting that bt > bt from Lemma

12.
This result should be interpreted carefully. The eventual return to liberalism and the dissipationof class con‡ict should be interpreted as a predicted outcome in an unattainable stage of economic
development. This is because most developed economies currently protect agriculture. In otherwords, it is di¢ cult for economies to achieve trade liberalization without there being politicalcon‡ict. The reason for this is that reaching such a stage of development requires highly productive
technology in the industrial sector.

6

Concluding Remarks

This article has developed a theoretical framework for understanding the evolution of trade policy,
underlying internal class con‡ict, and growth performance over the last few centuries. It has
analyzed the dynamic interaction between trade policy and economic growth, and has thereby
bridged a gap between two strands of the literature: open-economy growth theory and endogenoustari¤ theory. On the one hand, trade-policy preferences and the resulting trade policy dependon the stage of economic development. Because of the distributional e¤ects of trade liberalization,
income sources and income levels— both of which expand with economic development— characterize
individual attitudes toward trade policy. On the other hand, engaging in international trade a¤ects
aggregate output, factor prices, and income distribution by promoting specialization in sectors inwhich the economy has comparative advantages. This mutual dependence between trade policy
and industrialization facilitates an understanding of the evolution of economies.
Much of the paper’s focus is on 19th-century Western Europe, which had a comparative advantage in manufacturing in global markets and pulled ahead of other nations through trade. Consistent
with this historical experience, the theory developed in this paper argues that capital-abundant,
land-scarce economies, such as those of Western Europe, experience an ebb and ‡ow of liberalism
35

during the growth process.
The …rst wave of liberalism is triggered by a shift in landlords’attitudes to proindustrial policies.
This shift is associated with an increase in the importance of industrial capital to their portfolios.
Specialization in manufacturing, which follows trade liberalization, raises aggregate output by releasing the economy from its land constraints. Trade also bene…ts the landless poor by providingthem with inexpensive staple food.
The subsequent political backlash results from improved living standards and the accompanying
political participation of newly enfranchised workers, who care about the relative prices of both
capital-intensive goods and land-intensive goods. However, the retreat into protectionism is notinevitable, and di¤erent countries may pursue di¤erent trade policies in this intermediate stageof development. The paper predicts that political backlashes occur in moderately land-scarcecountries but not in severely land-scarce countries. These asymmetric results on trade protection
are consistent with the experience of Western Europe in the late 19th century.
The theory developed in this paper demonstrates that such economies develop through free
trade, although they may retreat temporarily into protectionism. By contrast, countries in whichlandlords have large land holdings are likely to remain protectionist and stagnant. This is because
the landed interests in these economies have a strong incentive to oppose proindustrial policies inorder to protect their principal income source, which is rents. Such negative attitudes to industrialization prevent improvements in working-class living standards and, accordingly, the masses must
spend most of their incomes on the consumption of staple foods, leaving no resources for savings.
Although this article has taken a novel approach to analyzing the relationship between trade
policy and economic development, it ignores several aspects relevant to the world economy during
the period under consideration. First, the model abstracts from technological progress, particularly improvements in transportation productivity, which has promoted the integration of global
markets. Second, the analysis of this paper is limited to the direct, quantitative impacts of tradein commodities on trading economies. However, as argued by Irwin (2001, 3), it is important toconsider Asian commodities, which were traded in small quantities, because these may have conveyed embodied new technology to Europe. Third, it is worth considering political games between
trading countries that adopt strategic policies. For this purpose, it is necessary to extend thesmall-open economy framework, which abstracts from other countries’trade policies. Finally, this36

paper has analyzed an economy that produces a single manufactured good and, hence, has ignored
the protection of manufacturing sectors. Although the paper’s focus on agricultural protection is areasonable simpli…cation for studying European trade policy before the 20th century, it would not
be appropriate for analyzing contemporary issues; currently, the protection of domestic industries
would a¤ect advanced economies more than would the protection of agricultural industries. Future
research should be directed to addressing these issues.

Appendix
is su¢ ciently small, @ 2 wt =(@pt )2 < 0; 8pt > pmint :Lemma 8 If

Proof. From (4) and (15),@wt= w0 (kt )kp (Kt ; pt ) =@pt

t FL (X; Lt ) > 0

for pt > pmin
t ;

where
1
;
1 + (1 Lt ) ttt

FLL ( )=FL ( )
Lt + (11:a)Lt +1 =(aX )(35)

Thus, the result is obtained by noting that FLL (X; Lt )Lp (Kt ; pt ) < 0 8pt > pmint :Proof of Lemma 1.

Given that (12) implies that cRt

cPt ; there are two other autarkicPequilibria to be examined. If F (X; Lt ) = cR^, then (A1) implies that Lt > L and thust = ct = c
R^, there is no aggregate demandcPt = FL (X; Lt ) < c^; which is a contradiction. If cRt (= It =pt+1 ) < c

for the manufactured good, and all workers would be employed in agriculture. Then, (A1) and (11)
imply that ItR =pt = F (X; 1)(1)FL (X; 1) > c^; a contradiction.

Proof of Lemma 2. The …rst result follows from (23) and (24), noting that L 2 (1; 1). On the

w =dB > 0 and dy w =dB = dy M;c =dB
other hand, the second result is obtained by noting that dwt+1
t
t
t
t+1
t+1

for Bt = B in (23).
Proof of Lemma 6.

If Rt+1

1; then (34) implies that

(Bt ; bPt ; pw ) > bPt for all bPt

0: If

Rt+1 < 1; then (A4) implies that Bt > B 0 and thus L(Bt ; pw ) = 0 by de…nition. Hence, the sign ofPw
P
B (Bt ; bt ; p ) depends on the ratio Bt =bt in this case, implying that the conditional steady-statetransfer, bPt =noting that

(Bt ; bPt ; pw ); is minimized at Bt = B: Then, the result follows from Lemma 5,(Bt ; 0; pw ) > 0 for Bt > B :37

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0

10

20

30

40

50

60

70

80

90

100

Source: Flora et al. (1983)

FranceGermany

Italy

Netherlands

NorwaySwedenUnited Kingdom

1815 1820 1825 1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925

Enfranchised as a % of the
population above legal voting
age

Figure 1. Trends in the Franchise

Year

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

%

1865

1870

1875

1885

Austria/Austria-Hungary

1880

France1890

Germany

1895

Italy

1900

1905

1910

Source: Michael A. Clemens and Jeffrey G. Williamson, Harvard University. Contact: jwilliam@harvard.edu

Figure 2(a). Trends in Import Tariffs, 1865-1913

Year

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

%

1865

1870

1875

1880

Denmark

1885

1895
United Kingdom

1890

1900

1905

Source: Michael A. Clemens and Jeffrey G. Williamson, Harvard University. Contact: jwilliam@harvard.edu

Figure 2(b). Trends in Import Tariffs, 1865-1913

1910

Year

Figure 3. The Conditional Dynamical System

Figure 4. Landlords' Optimal Trade Policies

Figure 5. Labor Dynamics in the Agricultural Sector