The Terms of Trade Between Spain and Britain and the Industrial Revolution

Abstract

In this chapter, the Prebisch thesis of a long-run deterioration of primary producers’ terms of trade vis-a-vis industrial nations and its consequences on the former’s welfare is tested for Spain and Britain in the age of the Industrial Revolution. At odds with the Prebisch doctrine, the evolution of the terms of trade between Spain and Britain had a positive effect on Spain’s welfare, as productive factors embodied in exportables improved in absolute and relative terms, supporting the view that Spain’s relative decline in the nineteenth century cannot be blamed on specialization along lines of comparative advantage.

1 Introduction

The terms of trade between industrialized nations and primary producers have been the subject of considerable debate since Ricardo’s (1817) and Torrens’s (1821) early writings. For more than a century, British economists from J. S. Mill to Marshall and Keynes interpreted secular trends in terms of trade as unfavourable to industrializing countries, reflecting the law of diminishing returns in agriculture and extractive industries, in contrast to constant or increasing returns in manufacturing industries (Rostow, 1950b; Spraos, 1980; Diakosavvas and Scandizzo, 1991).

After World War II, the terms of trade became one of the main concerns of development economists. Empirical studies carried out by the Statistical Department of the League of Nations under the supervision of Folke Hilgerdt (1945), and by Raul Prebisch (1949) at the Economic Commission for Latin America at the United Nations, suggested that there had been a deterioration in the net barter terms of trade of primary producers vis-á-vis industrialized countries between 1870 and 1938. This gave rise to a widely accepted Prebisch interpretation which suggests that, in the long run, the terms of trade between countries specialized in the production of raw materials and foodstuffs and industrial nations tend to deteriorate to the disadvantage of the former (Prebisch, 1949, 1950, 1959, 1963).¹ Furthermore, Hans Singer (1950, 1974–1975) stressed that favourable terms of trade would result in a sub-optimal resource allocation, favouring primary production and leading to de-industrialization.

The controversy about the secular trends in terms of trade of primary products percolated throughout economic history.² Ivan Berend and Giorgy Ranki (1980: 550) observed an improvement in Scandinavia’s and Hungary’s net barter terms of trade through the nineteenth century, but noted that ‘the situation was quite different in the case of the countries of the Iberian Peninsula’. In Spain, Nicolás Sánchez-Albornoz (1968: 145) asserted, `if the terms of trade circumstantially evolved in [its] favour, the historical trend shows that they did not last very long’, and Jordi Nadal (1975: 53) suggested that the net barter terms of trade deteriorated in the last quarter of the nineteenth century, while Joaquim Nadal Farreras (1978) claimed that the terms of trade between Spain and Britain provided a measure of Spanish dependency.

More recently, research has shifted from debating whether and why the terms of trade for primary vis-á-vis industrial producers (or primary vs. industrial goods) deteriorated, to investigating the shocks caused by the terms of trade and the impact of their volatility on developing countries (Hadass and Williamson, 2003; Blattman et al., 2007; Williamson, 2008) as well as analysing the statistical properties of long series of the terms of trade (Bleaney and Greenaway, 1993; Zanias, 2005; Ocampo and Parra-Lancourt, 2003, 2010). Nonetheless, some monographs investigate the Prebisch hypothesis of the terms of trade deterioration and its causes (Appleyard, 2006; Frankema et al., 2018).

This chapter investigates the long-run terms of trade between Spain and Britain over 200 years, encompassing the Industrial Revolution and Spain’s reorientation towards north-western Europe in the wake of Spanish American emancipation. It assesses whether the purchasing power of Spanish exports deteriorated vis-á-vis Britain and, more decisively, which country benefitted more from Spanish-British bilateral trade.

Different types of indices are proposed to analyse long swings in terms of trade. The net barter terms of trade (NBTT), that is, the relative price of exports in terms of imports, measures the purchasing power per unit of exports in terms of imports. However, if a change in the NBTT were endogenous, it would have no clear welfare significance, as it could be simply a consequence of an increase in the efficiency of exports production, or in job opportunities. That is why the purchasing power per unit of labour embodied in exported goods using the single factorial terms of trade (SFTT) requires consideration.

Both the NBTT and SFTT measure absolute differences between countries that result from patterns of trade and specialization. However, relative differences in per capita income between countries have been stressed as much as absolute gains in a country’s per capita income. Traditional patterns of trade between developing and developed countries (Periphery and Core), that is, primary goods in exchange for manufactured goods, it has been argued, have had an asymmetric impact on Core and Periphery, increasing international inequality. The income gap between developed and developing countries would have widened as trade reinforced the Periphery’s comparative advantage in primary produce (Hadass and Williamson, 2003).³ The double factorial terms of trade (DFFT) provide a measure of countries’ relative gains from trade.

2023The chapter shows that the NBTT improved remarkably in the hundred years prior to 1880, but became unfavourable between 1880 and 1913. Moreover, their impact on absolute and relative welfare was positive until 1900, as the (employment corrected weighted) single and double factorial terms of trade (ECWSFTT and ECWDFTT), show long-term gains, due to employment opportunities and productivity gains opened by an expanding trade sector. Thus, the view of a secular deterioration of the terms of trade between Spain and Britain throughout the eighteenth and nineteenth centuries is not supported by the evidence.

The chapter is organized as follows. Section 7.2 discusses the meaning and assessment of the net barter terms of trade, and Sects. 7.3 and 7.4 consider the trends of the NBTT and their immediate determinants, export and import prices. The impact on absolute and relative welfare stemming from international trade and specialization is examined in Sect. 7.5. Some closing remarks are offered in Sect. 7.6.

2 The Net Barter Terms of Trade: Concept and Measurement

The net barter terms of trade (NBTT) can be represented as:

$$ NBTT={P}_X:{P}_M $$

(7.1)

where P_X and P_M are index numbers of export and import prices, respectively. An increase in the NBTT means, on the basis of the price relationship alone, that a greater volume of imports can be obtained per unit of exports. In principle, an increase in the NBTT implies that the real income of a country grows faster than its output due to the growth of purchasing power per unit of its exports. There are, however, some important qualifications to be made before a deterioration in the terms of trade can be accepted as a reduction in a country’s real income. Only under classical assumptions of constant supply of resources, no technological change, full employment, and free competition do changes in the net barter terms of trade imply changes in real income (Baldwin, 1955: 263).

Nevertheless, movements in terms of trade are interesting for historians to analyse (Rostow, 1950a; Haberler, 1961). For instance, why do the terms of trade change? Have foreign or domestic supply curves shifted? Are changes in the terms of trade accompanied by changes in the export volume? Do changes in the net barter terms of trade relate to productivity changes in export industries?

I have constructed index numbers for both import and export prices. These index numbers do not reflect quality changes in the commodities traded and become less reliable over the long run. Even if base years are changed to cover segments of the time series, splicing becomes necessary to provide a long-term view. Still, these index numbers can only provide rough orders of magnitude for changes over long periods (Hansen, 1977). Among the different types of indices available, the Laspeyres index, in which the prices of each commodity are weighted with their base period quantities, has the advantage of reflecting only price variations. The Paasche index, weighted annually with the quantities traded, has the advantage of taking into consideration annual changes in the composition of trade, although it does not only reflect price changes over time. The Fisher index, the geometric mean of the Laspeyres and Paasche indices, is a compromise on which the discussion will focus (Kindleberger, 1956: 318–321; Allen, 1975; Hansen, 1977).

If P and Q represent price and quantity indices for each commodity exported _X and imported _M and the subindices i = 1,2,3 ... and o indicate the current year and base year respectively, the net barter terms of trade can be defined as

$$ {NBTT}_{\mathrm{Lapeyres}}=\left({P}_{\mathrm{Xi}}{Q}_{\mathrm{Xo}}/{P}_{\mathrm{Xo}}{Q}_{\mathrm{Xo}}\right):\left({P}_{\mathrm{Mi}}{Q}_{\mathrm{Mo}}/{P}_{\mathrm{Mo}}{Q}_{\mathrm{Mo}}\right) $$

(7.2)

$$ {NBTT}_{\mathrm{Paasche}}=\left({P}_{\mathrm{Xi}}{Q}_{\mathrm{Xi}}/{P}_{\mathrm{Xo}}{Q}_{\mathrm{Xi}}\right):\left({P}_{\mathrm{Mi}}{Q}_{\mathrm{Mi}}/{P}_{\mathrm{Mo}}{Q}_{\mathrm{Mi}}\right) $$

(7.3)

$$ {NBTT}_{\mathrm{Fisher}}={\left({NBTT}_{\mathrm{Laspeyres}}\cdot {NBTT}_{\mathrm{Paasche}}\right)}^{1/2} $$

(7.4)

An important distinction to be made is that, whereas prices for exports (1714–1869) and for imports (1714–1812) are price quotations for specific commodities, prices for exports (1870–1913) and for imports (1814–1913) are unit values.⁴ Unit values not only reflect changes in price quotations for specific kinds of goods, but also changes in the composition of commodity groups, including changes in type and quality.⁵ I have used f.o.b. prices for Spanish domestic exports, and f.o.b. and c.i.f. prices for imports of British goods in order to show how transport costs affected prices paid in Spain for imports, but since most trade was carried in British ships, c.i.f. prices are most relevant for computing shifts in Spain’s net barter terms of trade.

To make some allowance for changes in the structure of relative prices over time, each index has been constructed in nine distinct sub-periods, using the end year as the base year. These nine sub-periods have been chosen because there were no significant changes in the commodity composition of trade during each time span. These intervals have been linked at the overlapping years to obtain indices covering the whole period, and 1854 has been adopted as the final base year. The commodities involved in the construction of export and import price indices are shown in the Appendix, Tables 7.2 and 7.3. The chosen periods, link years, and base years for building the indices, together with the coverage of goods included in the price indices over total trade in the base years, are shown in Table 7.1.

Table 7.1 Construction of export and import prices

The lack of quantitative data for some commodities, and the fact that the value of other products make up a negligible percentage of total trade, renders a 70% coverage acceptable. The lower coverage for imported commodities during the second half of the nineteenth century stems from the fact that for a high percentage information is only available for values, not quantities. I have adopted the accepted convention of assuming that changes in the prices of commodities not included in the prices indices will be of similar amplitude and move in the same direction as those that make up the indices (Allen, 1975: 199–202).

3 Trends in the Net Barter Terms of Trade

The evolution of the Fisher net barter terms of trade reveals distinctive phases (Fig. 7.1).⁶ From 1714 to the early 1770s, the NBTT show no clear trend, but for a decline between the mid-1720s and -1740s and a subsequent recovery until the early 1750s, so the import capacity per unit of output exported remained practically unchanged. An expansionary phase encompassed from the late 1770s to the mid-1840s, during which time the import capacity per unit of exports quadrupled. War interrupted the expansion. The NBTT stalled in the 1790s, during the early stages of the Revolutionary and Napoleonic Wars and slowed down during the Peninsular War (1808–1814) and the first Carlist War (1833–1840). The long-run improvement in the NBTT was followed by stagnation from the mid-1840s to the late 1850s and, subsequently, decline until the late 1860s, at the time of financial and political crises. A swift recovery in the 1870s led to a historical a peak in the early 1880s (in which import capacity per unit of exports quintupled the level of the early eighteenth century). The NBTT then experienced a sustained deterioration until the eve of World War I, shrinking by one-third. Thus, by 1913, the import capacity per unit of output exported had fallen to the mid-1820s level, but the substantial increase in the purchasing power in terms of imports per unit of exports achieved during the Industrial Revolution was still preserved.

Fig. 7.1

Net barter terms of trade, 1714–1913: Fisher Index (1854=100, natural logs) (f.o.b. exports and c.i.f. imports). Note: Hodrick-Prescott trend, smoothing parameter set at λ = 100. Sources: Table 7.5

Thus, on the basis of price effects alone, the import capacity of a given volume of exports by 1913 was three and a half times greater than in 1714. The favourable long-run trend of Spain’s terms of trade with Britain meant that the number of British goods that could be obtained in exchange for £1 of Spanish goods in 1714 could be acquired for less than £0.3 by 1913.

After 1880, productivity gains in shipping were reflected in falling freight rates (North, 1965; Cairncross, 1953: 176). Because of the low percentage of transport costs in c.i.f. import values, as British manufactures had a very high value to bulk ratio, differences between f.o.b. and c.i.f. import prices were negligible for most of the 200 years considered. However, after 1880, coal imports from Britain became extremely important for Spain (Prados de la Escosura, 1988). Hence, the decline in freight rates partially offset the rise in prices for British commodities imported into Spain and, from 1884 to 1913, Spanish import capacity per unit of exports improved by 8% due to improvements in the efficiency of British shipping.⁷

4 Terms of Trade Drivers: Trends in Export and Import Prices

A series representing the terms of trade is a moving ratio between price indices which reflects the forces operating on the economy (Rostow, 1950a). Price indices for exports and imports followed a similar path, albeit with different intensities, in synchrony with the international economy (Bordo and Schwartz, 1981).

Distinctive phases can be discerned for Fisher export and import prices (Fig. 7.2).⁸ First, a phase in which prices declined, from 1714 until the mid-1740s for exports, and up to the mid-1750s, but at a slower pace, for imports. A second phase of price recovery spanned from the mid-eighteenth century to the Peninsular War, slower until the early 1790s for exports, and faster, up to the mid-1780s, for imports; and, then, prices accelerated to the 1800s, faster now in the case of exports, and peaking earlier for imports (1802) than for exports (1810), coinciding with major events of the Revolutionary and Napoleonic Wars: the Peace of Amiens (1802) and the Peninsular War (1808–1814), respectively.

Fig. 7.2

Export and import prices, 1714–1913: Fisher Index (1854=100, natural logs) (f.o.b. exports and c.i.f. imports). Note: Hodrick-Prescott trend, smoothing parameter set at λ = 100. Sources: Table 7.5

Two phases can be also observed between the Napoleonic Wars and the First World War. In the first one, a remarkable price decline took place until 1830, deeper for import prices, which fell to 30% of their peak level, while export prices shrank by a half. In the second phase up to World War I, prices exhibited fluctuations around a flat long-run trend. However, an episode of substantial price contraction took place in the late nineteenth century, with a 30% drop for exports from the mid-1870s to the late 1890s, and a fall of 35% for imports between the late 1860s and 1880s. A recovery followed, but only partially in the case of exports.

Rising British demand for primary goods, which composed most of Spanish exports—for which supply was relatively inelastic—, and increasing efficiency in the production of British (primarily manufactured) goods passed on as lower prices, explain the higher growth of Spanish export prices than import prices between the late eighteenth century and the Napoleonic Wars, and a slower decline from the end of the Napoleonic Wars up to the middle of the nineteenth century. This helps explain the long-run increase in the purchasing power per unit of Spanish exports. Shifts in the British offer curve largely accounted for the improvements in Spain’s net barter terms of trade with Britain during British industrialization. The growth of total factor productivity in British export industries supports this interpretation.⁹

The episode of declining purchasing power per unit of exports from the late 1850s to the late 1860s derives, to a large extent, from the rise in import prices. Growth in international demand for British goods, together with rising prices for raw cotton during the American Civil War, reflected in the prices of cotton manufactures, account for this increase. In addition, Spanish imports of British goods rose substantially in the late 1850s and early 1860s when railway construction started in Spain and required considerable quantities of technical equipment and fuel, leading to the single period of persistent trade deficit (1856–1865) with Britain between the Napoleonic Wars and the First World War.¹⁰ This situation, common to other areas of the world, helps explain the rise in prices for British manufacturers. Besides, coal shortages also occurred during these years, affecting not only the price of British coal—in great demand because of the spread of the railway and modern industry in Western Europe and other parts of the world—, but also the prices of steel and engineering goods, for which foreign demand was also rising very fast. The recovery of Spain’s NBTT in the 1870s is again connected with import prices. Coal shortages were eventually resolved and prices for British coal and those manufactures which used it as an input in their production fell sharply (Rostow, 1978: 93).

The deterioration of Spanish NBTT from 1880 to 1913 was partly due to the faster decline of export prices up to 1896, and their subsequent slower recovery. Furthermore, slackening productivity growth in British industry, coupled with strong demand for British manufactures from areas of recent settlement, driven by British investment, contributed to the post-1896 rise in import prices.¹¹ A shortage of coal in the late 1890s and early 1900s was also behind the rise in import prices for coal and steel and engineering manufactures (Rostow, 1978: 94).¹²

A partial explanatory element of the unfavourable trend in the NBTT in the 1890s and early 1900s is the lagged currency depreciation after Spain abandoned the convertibility of its currency, the Peseta, into gold in 1883. In the hypothetical absence of depreciation of Spanish currency, NBTT would have deteriorated only mildly until 1904 but would then have fallen more sharply (Fig. 7.8).

5 The Factorial Terms of Trade

Exogenous changes in the NBTT imply a gain or a loss of welfare, but the significance in terms of welfare is ambiguous when these changes are endogenous. NBTT may deteriorate as a result of increases in productivity, or in job opportunities in a context of unemployment. The factorial terms of trade broaden the scope and take productivity and employment on board.

Spanish terms of trade with Britain were affected by changes in either productivity or employment. Agriculture and mining provided most of Spain’s exports to Britain from 1880 to 1913. The exploitation of mineral resources with modem techniques, often by foreign investors, increased productivity, which was passed on to the international consumer in the form of lower export prices. Estimates of output per worker in the production of major ores and metals exported show clear improvements, with a 61% increase in average labour productivity.¹³ Export-oriented agriculture also experienced a labour productivity increase over the same period (Ayuda and Pinilla, 2021).

In nineteenth-century Spain, as in other Mediterranean economies, unemployment and underemployment were defining features of the labour markets (Toniolo, 1983). Day labourers (jornaleros) were out of work for one-quarter of the year in the 1850s (Garcia Sanz, 1979–1980: 63). Seasonal employment prevailed in the late nineteenth century: 210 days for the average bracero or farm labourer, out of a possible 300 days a year working (275 days as a lower bound) (Gómez Mendoza, 1982: 99–104). While Vandellós (1925: 119) suggested 250 days per worker/year estimated for 1913, close to García Sanz’s 242 days, and James Simpson’s (1992, 1995) detailed computations for Andalusia and Catalonia offer even fewer days worked per day labourer. Full employment occurred only during the summer months and peasants were idle for 3 or 4 months every year. Therefore, the opportunity cost of allocating agricultural labour to alternative occupations during the dead season was minimal.

The exploitation of minerals to cater for foreign demand provided more jobs, although the numbers involved were small and the mining industry never represented above 2% of the total hours worked in the Spanish economy (Prados de la Escosura, 2017). Internal migration and shifts within occupations from subsistence into more labour-intensive trade-oriented agriculture and mining was also stimulated by export growth.

5.1 Single Factorial Terms of Trade

To allow for changes in productivity in the export sector, economists examine the single factorial terms of trade (SFTT). This index measures a country’s absolute welfare resulting from international trade and specialization. The SFTT adds labour productivity in exportable production to the NBTT already weighted by the share of imports in home consumption.¹⁴

$$ SFTT= WSFTT={NBTT}^{\boldsymbol{\upomega}}O/L $$

(7.5)

where ⍵ is the share of imports in home consumption and O/L stands for labour productivity in the home country’s exportable output.

If there were chronic unemployment or underemployment, as in the case of nineteenth-century Spain, an increase in employment derived from export expansion would have the same effect on absolute real income as an increase in labour productivity. In this case, an ‘employment-corrected’ (EC) index is appropriate:

$$ ECWSFTT={NBTT}^{\boldsymbol{\upomega}}O/ LN $$

(7.6)

where N stands for an index of the volume of labour used in exportable production.

Given that NBTT = P_X/P_M and P_xO/L N = V, where V stands for the value of exportable output, ECWSFTT can be written as follows,

$$ ECWSFTT=\left({P_{\mathrm{X}}}^{\boldsymbol{\upomega} -1}V\right)/{P_{\mathrm{M}}}^{\boldsymbol{\upomega}} $$

(7.7)

In the case of Spanish-British trade, the value of exportable output (V) may be proxied by the value of exports (Prados de la Escosura, 1984). Minerals accounted for half the value of exports from the late 1870s to 1913, and most of this output was exported. A significant part of the production of commercial agriculture along the Mediterranean coast (almonds, oranges, raisins, as well as cork and Sherry wine), found its way to Britain (Prados de la Escosura, 1982, 1984). As for the share of imports in home consumption for the post-1778 period, it has been proxied by the ratio of total Spanish c.i.f. imports to GDP.¹⁵

Figure 7.3 presents estimates for employment-corrected weighted single factorial terms of trade (ECWSFTT) from 1778 to 1913. After an intense recovery from a war scenario in the 1780s, a phase of sustained improvement, but for the Peninsular War years, covered from 1790 to 1850 (at 1.5% trend growth rate). This long phase gave way to another of acceleration until the early 1900s (3.7%). However, the decade up to the First World War witnessed a deterioration (−1.1%). Over the entire period considered, however, the ECWSFTT multiplied by 40, which implies a trend growth of 2.9% per year.

Fig. 7.3

Employment corrected weighted single factorial terms of trade, 1778–1913 Fisher Index (1854=100, natural logs) (f.o.b. exports and c.i.f. imports). Note: Hodrick-Prescott trend, smoothing parameter set at λ = 100. Sources: Table 7.6

Thus, the deterioration of the NBTT from 1880 to 1913 (−1.2%) was more than offset by improvements in employment opportunities and in labour productivity in the exportable sector, with the ECWSFTT trend growth reaching 1.2%. It was only during the first decade of the twentieth century (1903–1913) that the single factorial terms of trade deteriorated.

We may conclude that immiserizing growth, that is, allocating an increasing amount of resources to the production of exportables for which the SFTT deteriorate, did not occur in the economic relations between Spain, a primary producer, and Britain, the first industrial nation, from the late eighteenth to the twentieth century.

So far, only changes in absolute welfare stemming from international trade and specialization have been considered. We have seen, however, the apparent paradox of nineteenth-century Spain raising its income per head and simultaneously worsening its position vis-à-vis the core countries of north-west Europe (Figs. 1.5 and 1.11). Thus, it is theoretically possible for patterns of trade and specialization to increase absolute welfare for Spain as measured by the ECWSFTT but, at the same time, to decrease the country’s income relative to Britain.

5.2 Double Factorial Terms of Trade

Double factorial terms of trade (DFTT) are designed to assess the impact of patterns of trade on relative welfare. More specifically, the DFTT represent ‘the number of man-hours needed on average to produce foreign exportables of a value equal to 1 hour’s production of home exportables’ (Spraos, 1983: 76). When weighted by the import share of each country involved, to take into account the relative importance trade commodities in each country’s consumption basket, the DFTT can be written:

$$ WDFTT=\left({NBTT}^{\boldsymbol{\upomega} +\boldsymbol{\upomega} \ast }O/L\right):\left.{O}^{\ast }/{L}^{\ast}\right) $$

(7.8)

where * stands for the foreign country, in this case, Britain.

Employment correction appears necessary where unemployment and underemployment were persistent, as in the case of Spain, but not for Britain (Matthews et al., 1982: 81–95; Williamson, 1985: 20–22).¹⁶ An appropriate index in which relative welfare is accounted for with allowances for changes in employment can be expressed as

$$ ECWDFTT=\left({NBTT}^{\boldsymbol{\upomega} +\boldsymbol{\upomega} \ast }O/ LN\right):\left({O}^{\ast }/{L}^{\ast}\right) $$

(7.9)

and, as in (7.7), it may be transformed into

$$ ECWDFTT=\left({{\mathrm{P}}_{\mathrm{X}}}^{\boldsymbol{\upomega} +\boldsymbol{\upomega} \ast -1}V\right):\left({{\mathrm{P}}_{\mathrm{M}}}^{\boldsymbol{\upomega} +\boldsymbol{\upomega} \ast }{O}^{\ast }/{L}^{\ast}\right). $$

(7.10)

Figure 7.4 presents the findings for relative welfare stemming from Ricardian patterns of trade and specialization, which reveal an initial phase, in which after a post-war strong recovery until 1790, a mild improvement took place between 1790 and 1850 (1.0% trend growth rate), punctuated by episodes of acceleration (up to 1790, 1814–1830) as well as of stagnation or decline. A second, steadier phase extended up to 1900 in which the trend growth rose to 2.6%. A third phase of negative trend growth (−1.9%) lasted until the First World War. Over the entire time span considered (1778–1913), the relative welfare derived from patterns of trade and specialization, measured by the ECWDFTT multiplied 14-fold, at a 2.1% trend growth rate.¹⁷

Fig. 7.4

Employment corrected weighted double factorial terms of trade, 1778–1913: Fisher Index (1854=100, natural logs) (f.o.b. exports and c.i.f. imports). Note: Hodrick-Prescott (H-P) trend, smoothing parameter set at λ = 100. Sources: Table 7.6

These results imply that, together with the evolution of the NBTT, the increase in employment and labour productivity provided by trade specialization more than offset the rise in British labour productivity from 1778 to 1900. Specifically, the deterioration of the NBTT after 1880 was more than offset, as shown by the evolution of both the ECWSFTT and ECWDFTT, thereby precluding inequalising trade between Spain and Britain. It was only during the decade prior to the First World War that Spanish-British terms of trade provoked immiserizing growth and trade had an inequalising effect.

Furthermore, both single and factorial terms of trade exhibited a positive trend until 1900, satisfying the welfare-neutral requirement to prevent a deterioration of welfare when exports which include natural resources, are exchanged for reproducible goods (Spraos, 1983: 78–79).

6 Conclusions

After the loss of the American mainland empire, Spain reoriented towards Western Europe’s markets, increasing its share of trade with the early industrial nations. It has been often argued that this led to an unequal exchange that, albeit favourable to some interest groups was, on the whole, negative for the Spanish economy, as it pushed it towards a sub-optimal path of development. This sub-optimal path resulted from following Spain’s comparative advantage in primary produce, with the implicit opportunity cost of failing to develop along the lines traced by the pioneers of the Industrial Revolution. This chapter has addressed the issue by looking at the evolution of the terms of trade between Spain and Britain, the cradle of the Industrial Revolution.

The NBTT improved remarkably over 1780–1880, though it fell from 1880 to 1913. Changes in the NBTT have, however, different implications for a country’s welfare, depending on whether they derive from endogenous or exogenous sources. In fact, what really matters is not the purchasing power per unit of export—what NBTT measure—but the purchasing power per unit of labour embodied in export goods—what the factorial terms of trade measure. Estimates for the (employment-corrected weighted) single factorial terms of trade (ECWSFTT) show long-term gains due to employment opportunities and productivity gains resulting from opening up. This implies that absolute welfare for those employed in sectors linked to international trade improved until the twentieth century. Furthermore, double factorial terms of trade (adjusted for unemployment) [ECWDFTT] also exhibit sustained gains throughout the late eighteenth and nineteenth centuries. Rising employment in the exportable sector and improvements in labour productivity more than offset labour productivity gains achieved by the British economy. Hence, Spain’s incomes from trade and specialisation evolved favourably relative to Britain’s until 1900.

All this suggests that the negative assessment of Spain’s reorientation towards north-western Europe is unwarranted. Falling behind Western European levels cannot be blamed on economic specialization along lines of comparative advantage. On the contrary, throughout the late eighteenth and nineteenth century the Spanish economy took full advantage of British industrialization. The sectors most closely associated with international patterns of specialisation did not share the inequalising experience that the Spanish economy as a whole suffered over the century. The explanation for the growing gap in living standards between Spain and Britain (and, by extension, the Core countries of Western Europe) must be sought outside the export sector.

Appendix

See Tables 7.2, 7.3, 7.4, 7.5 and 7.6.

Table 7.2 Annual series for export and import price indices

Table 7.3 Price series and their sources

Table 7.4 Net barter terms of trade between Spain and Britain, (1714–1913) (f.o.b. export and import prices)

Table 7.5 Net barter terms of trade between Spain and Britain, (1714–1913) (f.o.b. export and c.i.f. import prices)

Table 7.6 Single and double factorial terms of trade between Spain and Britain, (1778–1913) (f.o.b. export and c.i.f. import prices)

See Figs. 7.5, 7.6, 7.7, 7.8, 7.9 and 7.10.

Fig. 7.5

Net barter terms of trade, 1714–1913: Laspeyres and Paasche Indices (1854=100) (f.o.b. exports and c.i.f. imports). Note: Hodrick-Prescott (H-P) trend, smoothing parameter set at λ = 100. Sources: Table 7.5

Fig. 7.6

Export f.o.b. prices, 1714–1913: Laspeyres and Paasche Indices (1854=100). Note: Hodrick-Prescott (H-P) trend, smoothing parameter set at λ = 100. Sources: Table 7.5

Fig. 7.7

Import c.i.f. prices, 1714–1913: Laspeyres and Paasche Indices (1854=100). Note: Hodrick-Prescott (H-P) trend, smoothing parameter set at λ = 100. Sources: Table 7.5

Fig. 7.8

Actual and counterfactual* NBTT, 1879–1913: Fisher Index (1854=100). *In the counterfactual of the absence of Peseta’s depreciation

Fig. 7.9

Employment corrected weighted and unweighted single factorial terms of trade, 1778–1913: Fisher Index (1854=100, natural logs) (f.o.b. exports, c.i.f. imports). Note: Hodrick-Prescott trend, smoothing parameter set at λ = 100. Sources: Table 7.6

Fig. 7.10

Employment corrected weighted and unweighted double factorial terms of trade, 1778–1913: Fisher Index (1854=100, natural logs) (f.o.b. exports, c.i.f. imports). Note: Hodrick-Prescott (H-P) trend, smoothing parameter set at λ = 100. Sources: Table 7.6