Real Wages and Relative Factor Prices in the Third World Before 1940: What Do They Tell Us About the Sources of Growth?
This paper uses a new pre-1940 Third World data base documenting real wages and relative factor prices to explore their determinants. There are three possibilities: external price shocks, factor endowment changes, and technological change. While the paper lays out an explicit econometric agenda for the future, it looks like external price shocks were doing most of the work, and declining-transport-cost-induced commodity price convergence in particular. Real wages in Asia, the Middle East and Latin America never showed signs of much catching up with the European industrial leaders prior to 1914, but at least they held their own. The ratio of wages to land rents, on the other hand, declined up to World War I, and so did the ratio of wages to GDP per capita. The trend reversed thereafter. These relative factor price movements help sharpen our understanding of the sources of growth (or lack of it) in Asia and Latin America prior to 1940. They also offer strong hints about changes in income distribution there.
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