Department of Economics
University of California
The 20th Century World Economy
Berkeley CA 94720
Problem Set Guide
Prepared by Jonathan Rose
Portfolio Investment Flows
These flows refer to the ownership of foreign securities, including equity, and private and public bonds; the last two
were particularly large during the first wave of globalization. The Nayyar article contains some descriptive statistics
to indicate the growth of this type of investment during the first wave of globalization.
Portfolio flows were
certainly important in the growth of recipient countries during the first wave; for example, there were large flows
from Britain for infrastructure development in the United States, Canada and Australia.
While this form of
investment accounted for the majority of international capital flows during before 1913, since 1970 the dominant
form has been foreign direct investment, in which investors actively control the operation of the assets in the
This reversal can be understood in the context of the lesser quantity and quality of information
flows during the first wave, which encouraged investors to invest in relatively more secure bonds, and in projects
with clearly defined physical assets, such as railroads.
Those long term flows contrast with were less susceptible to
sudden stops as many forms of modern investment, though, creating a tradeoff between growth and financial crises.
1.2. Laissez Faire
With respect to the world economy, laissez faire characteristics typically include the minimization of government
interference with cross border transactions such as trade, capital flows, and migration.
Not all liberalization was
voluntary, however, since some of the liberalization is attributable to the impositions of colonial powers.
Nevertheless, these cross-border liberalizations were a defining characteristic of the first wave of globalization when
considered in contrast with pre-1870 history, and with the interwar period.
The gold standard is a helpful context in understanding these policies.
Capital restrictions would have been a barrier
to the maintenance of gold parities, and trade barriers would (arguably) have blocked a potential adjustment
In many senses, the gold standard entailed subservience of domestic priorities to international ones,
which naturally complements laissez faire policies.
From a modern perspective, freedom of migration during the first wave has few modern parallels.
are lower in many countries today, and indeed while tariffs may have fallen during the first wave of globalization,
they remained substantial and many European countries relapsed into protectionism beginning the late 1890’s.
Capital restrictions were historically high during the Bretton-Woods era, but today are beginning to resemble the