Did the great influenza of 1918-1920 trigger a reversal of the first era of globalization?

Abstract

I revisit the 1918-20 pandemic and ask whether it led to a reversal in the rise of trade and financial globalization that preceded it. Using annual data for 17 countries for the 1870-1928 period, a variety of tests and techniques are used to draw some robust conclusions. Overall, the pandemic a century ago interrupted, but did not put an end, to the first globalization of the twentieth century. However, two blocs consisting of combatant and non-combatant countries, experienced significantly different consequences. Globalization was sharply curtailed for the combatant countries while there were few, if any, consequences for globalization in the non-combatant group of countries. That said, there was considerable resilience especially in trade openness among several of the combatant economies. Perhaps changes in the make-up of economic blocs, post-pandemic, is a fallout from shocks of this kind. While there are lessons for the ongoing COVID pandemics differences between the 1920s and today also play a role.

Supplementary information: The online version contains supplementary material available at 10.1007/s10368-021-00526-1.

Keywords: Financial integration; Globalization; Great Influenza 1918–20; Openness.

Fig. 1

Openness: 1870–1928. Note: Openness is 100 times (Exports + Imports)/GDP. Data from http://www.macrohistory.net/data/. The 1914–18 and 1918–20 periods are highlighted as are, where appropriate, years when central banks were introduced. Gaps in the lines indicate data are not available

Fig. 2

A. Impact of Pandemic Death Rates on Openness: Quantile Estimates. Note: Eq. (1) estimated for the quantile range shown. Epanechnikov kernel sparsity, Hall-Sheather bandwidth method, and Huber sandwich standard errors. B. Impact of Pandemic Death Rates on Real Interest Rates: Quantile Estimates. Note: Eq. (2) estimates for the quantile range shown. See also note to Fig. 2A for additional details

Fig. 2

A. Impact of Pandemic Death Rates on Openness: Quantile Estimates. Note: Eq. (1) estimated for the quantile range shown. Epanechnikov kernel sparsity, Hall-Sheather bandwidth method, and Huber sandwich standard errors. B. Impact of Pandemic Death Rates on Real Interest Rates: Quantile Estimates. Note: Eq. (2) estimates for the quantile range shown. See also note to Fig. 2A for additional details

Fig. 3

A. Impulse Responses of the Impact of Pandemic Death Rates on Openness. Note: Eq. (1) estimated via the local projections method. See Eq. (3). The black lines are the mean coefficient estimates and the two bands are, respectively, + or—1 or 2 standard deviations around the mean. B. Impulse Responses of the Impact of Pandemic Death Rates on Real Interest Rates. Note: See note to Fig. 3A. Estimates are for Eq. (4)

Fig. 3

A. Impulse Responses of the Impact of Pandemic Death Rates on Openness. Note: Eq. (1) estimated via the local projections method. See Eq. (3). The black lines are the mean coefficient estimates and the two bands are, respectively, + or—1 or 2 standard deviations around the mean. B. Impulse Responses of the Impact of Pandemic Death Rates on Real Interest Rates. Note: See note to Fig. 3A. Estimates are for Eq. (4)

Fig. 4

A. Probability of Remaining in the Globalization State: Openness. Note: Eq. (1) estimates of being in the high probability state (high degree of openness) in a two-regime Markov switching model with openness or the real interest rate as a function of lagged inflation whose imnpact is regime-specific. In addtion, deaths and combat deaths, and UK openness, lagged one year, are added determinants common to both regimes. See the main text for more details. Selected estimates as explained in the text. Gaps due to missing data for some years for some countries. B. Probability of Remaining in the Financial Globalization State: Real Interest Rates. Note: Eq. (2). See text and notes to Fig. 4A

Fig. 4

A. Probability of Remaining in the Globalization State: Openness. Note: Eq. (1) estimates of being in the high probability state (high degree of openness) in a two-regime Markov switching model with openness or the real interest rate as a function of lagged inflation whose imnpact is regime-specific. In addtion, deaths and combat deaths, and UK openness, lagged one year, are added determinants common to both regimes. See the main text for more details. Selected estimates as explained in the text. Gaps due to missing data for some years for some countries. B. Probability of Remaining in the Financial Globalization State: Real Interest Rates. Note: Eq. (2). See text and notes to Fig. 4A

Fig. 5

Cross-Country Out of Sample Forecasts of Openness. A Combatant Countries. B Non-Combatant Countries. Note: The thick black line is observed ω; the relatively smooth line is the (counterfactual) out of sample forecast (1870–1913) from Eq. (1). The dashed lines are ± 2 SD confidence intervals. The horizontal axis is labelled country-year. For example, 1–17 is the (forecast) of openness for Australia in 1917. Country number key: 1 = Australia, 2 = Belgium, 3 = Canada, 4 = Denmark, 5 = Finland, 6 = France, 7 = Germany, 8 = Italy, 9 = Japan, 10 = Netherlands, 11 = Norway, 12 = Portugal, 13 = Spain, 14 = Sweden, 15 = Switzerland, 16 + UK, 17 = USA