What drives commodity market integration? : evidence from the 1800s ; measuring economic integration

This article provides empirical evidence from the ‘first wave of globalization’ in the 19th century for the question as to how commodity markets integrated domestically and internationally. I apply a dynamic factor model borrowed from business cycle analysis that for the first time allows me to fully exploit the cross-sectional and time-series dimensions of my large wheat price data set. It treats national and international market integration as conditional, and provides unique evidence on the integration of single cities as well as of countries and country groups. Three main results emerge from this: (i) The strongest push toward globalization happened in the first half of the century, not the second. This contradicts conventional wisdom emphasizing a transport revolution after 1850. (ii) After 1880, protectionist countries experienced a globalization backlash despite their well-developed transportation networks. (iii) National differences matter even when controlling for geography and trade policy. Some countries integrated domestically after some single cities, while others first developed a well-functioning domestic market and then globalized as a nation. The latter coincide with countries that have a long history as a unified nation.