Friday, 26 August 2016

The revealed comparative advantages of late-Victorian Britain

This blog post was written by
Brian Varian, PhD candidate at LSE
It has been argued that the manufacturing comparative advantages of late-Victorian Britain rested in the relatively labour-intensive industries. However, one problem with this argument is that Britain’s manufacturing comparative advantages have never been properly and systematically measured for any period prior to the twentieth century.

It is generally conceded that late-Victorian Britain realized a comparative advantage in the ‘staple industries’ of textiles and iron (Harley 2014). However, Britain’s manufacturing sector extended well beyond the traditional staple industries. In which other manufacturing industries did late-Victorian Britain possess a comparative advantage? In a recent EHES working paper, I answer this question by calculating indicators of revealed comparative advantage (RCA) for 17 British manufacturing industries for the years 1880, 1890, and 1900. Using these RCA indicators, I then proceed to argue that, in contrast to previous literature (Crafts and Thomas 1986), Britain’s manufacturing comparative advantages were in the relatively labour non-intensive industries.

My working paper offers the first systematic, sector-wide measurements of the manufacturing comparative advantages (disadvantages) of late-Victorian Britain. Such measurements exist for a later period; Crafts (1989) calculated RCA indicators for British manufacturing industries for the years 1899, 1913, 1929, 1937, and 1950. However, I argue that his RCA indicators for 1899 are misleading, largely on account of how Crafts segments the manufacturing sector into individual industries. One particular concern is how 46 per cent of Britain’s manufactured exports in 1899 are reduced to just a single industry—textiles. In my working paper, I treat the four textile industries of cottons, linens, silks, and woollens separately, and I find very substantial variation among these industries, with respect to both comparative advantage and factor intensity. This variation is obscured when there is a single industry for textiles.

Like Crafts, I calculate indicators of revealed comparative advantage (RCA) following the method advanced by Balassa (1965). The RCA indictor is simply the country share of per-industry world exports, normalized for the country share of total world exports. An indicator greater than 1 implies a comparative advantage, an indicator less than 1 a comparative disadvantage. The RCA indicators, for just the year 1890, are presented in the figure below.

British manufacturing comparativ advantages 1890 (click to  enlarge)

Among the manufacturing industries of late-Victorian Britain, cotton manufactures held pride of place, as expected. Yet, Britain was at a distinct comparative disadvantage in the industries of leather and manufactures thereof; glass; silk manufactures; and clocks and watches. Were these comparative-disadvantage industries similar with respect to their factor intensities? 

I identify the factor determinants of Britain’s manufacturing comparative advantages using a four-factor Heckscher-Ohlin model, the four factors being capital, (unskilled) labour, material, and human capital. Proxies for the factor intensities of the industries were obtained from British government publications, chiefly the first Census of production (1907)—the backward imposition of Edwardian factor intensities is perhaps more forgivable in the context of a mature economy with rather slow growth in the stocks of manufacturing capital and labour (Matthews et al. 1982). Care is exercised in obtaining consistent industry definitions between the RCA indicators and the factor proxies. 

I find that Britain’s manufacturing comparative advantages were positively associated with capital intensity and negatively associated with labour intensity. The comparative advantages were neutral with respect to material and human capital intensity.

The labour non-intensity of Britain’s manufacturing comparative advantages is my most surprising finding. Crafts and Thomas asserted that, in the year 1880, Britain’s manufacturing ‘comparative advantages’ were in the relatively labour-intensive industries. However, their analysis relies on non-normalized gross exports as a proxy for comparative advantage, whereas my analysis relies on a theoretically-founded measure of comparative advantage.

RCA indicators and factor intensity proxies (click to enlarge)

The factor determinants of Britain’s manufacturing comparative advantages are well-illustrated by a comparison of two textile industries: cotton manufactures and silk manufactures. The table above reports the RCA indicators and factor-proxy values for both of these industries, as well as the average factor-proxy values across all 17 industries. In the relatively capital-intensive, labour non-intensive industry of cotton manufactures, Britain had a comparative advantage. But in the relatively labour-intensive, capital non-intensive industry of silk manufactures, Britain was at a comparative disadvantage.

The labour non-intensity of Britain’s manufacturing comparative advantages departs from the archetype of labour-utilizing British manufacturing and labour-economizing American manufacturing in the nineteenth century (Habakkuk 1962). By the closing decades of the nineteenth century, a labour-economizing regime had taken hold in the British manufacturing sector. In this respect, the British and American manufacturing sectors appear more similar than different. Overall, my finding is consistent with the Anglo-American real-wage convergence of the late nineteenth century (Williamson 1995).

Given Britain’s relative scarcity of natural resource endowments, the material neutrality of the manufacturing comparative advantages might seem surprising. Yet, as I argue in the working paper, this constraint upon the British manufacturing sector was mitigated by high levels of economic integration in the resource-rich British Empire (Mitchener and Weidenmier 2008; Jacks et al. 2010) and a free-trade policy that extended to imported material inputs. Moreover, energy was an important material input in many industries, and Britain was favourably endowed with coal. 

In conclusion, a pattern emerges among the (hitherto unmeasured) manufacturing comparative advantages of late-Victorian Britain: they were labour non-intensive. Moreover, this finding remains robust after controlling for human capital intensity. If the British manufacturing sector now more closely resembles the American manufacturing sector, how does it compare to the Continental manufacturing sector? Further research ought to pursue this comparison. 

The working paper can be downloaded here:

Balassa, B., ‘Trade liberalisation and “revealed” comparative advantage’, Manchester School, 33 (1965), pp. 99-123.
Crafts, N. F. R., ‘Revealed comparative advantage in manufacturing, 1899-1950’, Journal of European Economic History, 18 (1989), pp. 127-37.
Crafts, N. F. R. and Thomas, M., ‘Comparative advantage in UK manufacturing trade, 1910-35’, Economic Journal, 96 (1986), pp. 629-45.
Habakkuk, H. J., American and British technology in the nineteenth century (Cambridge, 1962).
Harley, K., ‘The legacy of the early start’, R. Floud, J. Humphries, and P. Johnson, eds., The Cambridge economic history of modern Britain, II, 1870 to the present (Cambridge, 2014), pp. 1-25.
Jacks, D. S., Meissner, C. M. and Novy, D., ‘Trade costs in the first wave of globalization’, Explorations in Economic History, 47 (2010), pp. 127-41.
Matthews, R. C. O., Feinstein, C. H. and Odling-Smee, J. C., British economic growth, 1856-1973 (Oxford, 1982).
Mitchener, K. J. and Weidenmier, M., ‘Trade and empire’, Economic Journal, 118 (2008), pp. 1805-34.
Williamson, J. G., ‘The evolution of global labor markets since 1830: background evidence and hypotheses’, Explorations in Economic History, 32 (1995), pp. 141-96.

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