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					              Questions to be Answered
                Facts About the Industry
      Modeling the Industry Theoretically
                      Empirical Evidence
                             Conclusion




The Role of World War I in the Cotton Industry’s
        Shift from Lancashire to Japan

                            Sarah Cochrane
                           University of Oxford


                     Strasbourg FRESH Meeting
                        14th November 2008



                         Sarah Cochrane     The Impact of WWI on the Cotton Industry
                    Questions to be Answered
                      Facts About the Industry
            Modeling the Industry Theoretically
                            Empirical Evidence
                                   Conclusion


Outline


   Questions to be Answered

   Facts About the Industry

   Modeling the Industry Theoretically

   Empirical Evidence

   Conclusion



                               Sarah Cochrane     The Impact of WWI on the Cotton Industry
                   Questions to be Answered
                     Facts About the Industry
           Modeling the Industry Theoretically
                           Empirical Evidence
                                  Conclusion


Key Questions



      Britain was able to retain leadership of the industry until 1913
      despite being a high-wage economy; how did she manage to
      out-compete low-wage competitors for so long?
      The literature so far does not consider the impact World War
      I had on Lancashire; did the war have a role to play in the
      timing or the speed of Lancashire’s decline/Japan’s rise?




                              Sarah Cochrane     The Impact of WWI on the Cotton Industry
                   Questions to be Answered
                     Facts About the Industry
           Modeling the Industry Theoretically
                           Empirical Evidence
                                  Conclusion


Overview of the Industry’s Development




      Britain was the dominant producer and productivity leader
      (Leunig, 2003) until the eve of World War I,
      Japan was a minor player in the cotton market until 1913,
      when the industry took off and rose to be the dominant
      producer.




                              Sarah Cochrane     The Impact of WWI on the Cotton Industry
                    Questions to be Answered
                      Facts About the Industry
            Modeling the Industry Theoretically
                            Empirical Evidence
                                   Conclusion


Overview of the Industry’s Development

     Figure 1: Shares of World                    Figure 2: British Raw Cotton
      Cotton Trade, 1883-1937                             Consumption




                               Sarah Cochrane        The Impact of WWI on the Cotton Industry
                   Questions to be Answered
                     Facts About the Industry
           Modeling the Industry Theoretically
                           Empirical Evidence
                                  Conclusion


Cotton Producers and Consumers


      Output was differentiated between producers (primarily by
      count), and consumers liked variety (Brown, 1995),
      The cotton industry in Lancashire, Japan and even the US
      contained lots of different producers, each of which specialised
      in different types of output,
      There were strong agglomeration forces in all three countries,
      leading to one area dominating the industry (Lancashire in
      Britain, Osaka in Japan etc).




                              Sarah Cochrane     The Impact of WWI on the Cotton Industry
                   Questions to be Answered
                     Facts About the Industry
           Modeling the Industry Theoretically
                           Empirical Evidence
                                  Conclusion


Building the Model

      The strong agglomeration forces imply that there were
      external economies of scale in production. Broadberry and
      Marrison (2002) find empirical evidence for this in Lancashire
      and highlight the benefits of close connections with
      merchants, the large, unified Liverpool cotton market and the
      Manchester exchange,
      The presence of differentiated output implies internal
      economies of scale, which David (1975) finds for the
      American industry,
      The large number of firms operating and producing different
      outputs suggests consumer preference for variety (Dixit and
      Stiglitz, 1977).

                              Sarah Cochrane     The Impact of WWI on the Cotton Industry
                   Questions to be Answered
                     Facts About the Industry
           Modeling the Industry Theoretically
                           Empirical Evidence
                                  Conclusion


Simulation Results
      Lancashire was able to maintain its dominant position by
      using its highly developed and integrated network of suppliers,
      producers and merchants to offset its wage disadvantage,
      World War I temporarily halted Britain’s exports, allowing
      non-combatant Japan to expand production and begin
      building up her own network of producers,
      By the time Lancashire re-entered the market, Japan’s
      industry had developed enough to undercut the former
      incumbent (with a combination of low wages and the
      experience gained during the war), stealing Britain’s former
      export markets
      The war was crucial in determining the timing and speed of
      Lancashire’s decline and Japan’s rise.
                              Sarah Cochrane     The Impact of WWI on the Cotton Industry
                    Questions to be Answered
                      Facts About the Industry
            Modeling the Industry Theoretically
                            Empirical Evidence
                                   Conclusion


Overview of the Industry’s Development

     Figure 1: Shares of World                    Figure 2: British Raw Cotton
      Cotton Trade, 1883-1937                             Consumption




                               Sarah Cochrane        The Impact of WWI on the Cotton Industry
                     Questions to be Answered
                       Facts About the Industry
             Modeling the Industry Theoretically
                             Empirical Evidence
                                    Conclusion


Lancashire’s Development Path
   We use a time series structural break methodology to test whether
   1913 was a significant turning point in Britain’s cotton goods
   exports.

                               1913       1919       1930
          xt = γ0 + γ1 t + γ2 Dt    + γ3 Dt    + γ4 Dt    + ut                                (1)

       Table: Estimated Coefficients and t-statistics for British Exports
                                Coefficient                     PG
                            Random Walk t-stat               -5.23
                                Pre-War Trend              0.014
                                  War Trend                -0.071
                                 1920s Trend               -0.029
                                 1930s Trend               -0.087

                                Sarah Cochrane     The Impact of WWI on the Cotton Industry
                    Questions to be Answered
                      Facts About the Industry
            Modeling the Industry Theoretically
                            Empirical Evidence
                                   Conclusion


Japan’s Development Path
   Due to a lack of data, we can only compare the pre (1890 - 1913)
   and post-WWI (1921 - 1937) growth rates to see if they differ
   significantly.

                                  xt = γ0 + γ1 t + Ut                                        (2)


          Table: Growth Rate Estimates and Chow Test for Japan
                 Coefficient                          Estimate          t-statistic
               Pre-War Trend                         0.001              19.78
               Interwar Trend                       0.00937              2.52
            Lagged World Share                     0.5881598             3.37
           Change in γ1 Chow Test                   0.00826              3.58

                               Sarah Cochrane     The Impact of WWI on the Cotton Industry
                     Questions to be Answered
                       Facts About the Industry
             Modeling the Industry Theoretically
                             Empirical Evidence
                                    Conclusion


Conclusion


      The model simulations highlighted the knife-edge equilibrium
      that existed before WWI, with Lancashire just about offsetting
      her wage disadvantage with her external economies advantage,
      By allowing Japan’s output to expand unchallenged, the war
      shifted the equilibrium, tipping Lancashire into a rapid decline.
      Without the war, her decline would have been later, and much
      more gradual,
      The empirical evidence supports these results, with both
      industries going through a turning point in 1913.



                                Sarah Cochrane     The Impact of WWI on the Cotton Industry

				
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