Market integration in South Africa before unification1 WILLEM H. BOSHOFF2 AND JOHAN FOURIE3 The discovery of minerals in the South African interior caused volatile economic transformation and political upheaval across southern Africa which included one of Britain’s most expensive colonial wars (1899-1902) and the unification, in 1910, of two British territories and two defeated Afrikaner republics. Using techniques borrowed from the applied business cycle literature, we use two data sources to, firstly, show market integration between South Africa and her main trading partners following the discovery of diamonds, and, secondly, within South Africa after the Second South African War. Evidence for the first hypothesis is obtained from an annual grain price series spanning 76 years, while evidence for the second hypothesis comes from a new, monthly panel dataset of 5 commodities across 21 South African towns between 1897 and 1910. JEL CODES: F15, N17, N77 KEYWORDS: market integration, South Africa, globalization, business-cycle filters, convergence, law of one price INTRODUCTION The process by which markets integrate is, or should be, fundamental in an explanation of the causes of industrialisation and economic progress. The rapid growth of the eighteenth- and nineteenth century Atlantic economy was, for example, to a large extent dependent on the decline in trans-Atlantic transport costs and the integration of the European and North American economies (North, 1958, O'Rourke and Williamson, 2002). When exactly this occurred, is a matter of much recent debate (Sharp and Weisdorf, 2013). Understanding when and how markets integrate also helps to explain comparative change: Shiue and Keller (2007), for example, show that markets in England performed better than those in Western Europe and the Yangzi delta on the eve of the Industrial Revolution. Using grain prices for 100 European cities, Chilosi et al. (2013) show that market integration in Europe was a ‘gradual and step-wise 1 The authors would like to thank Wynand Fourie, Matlhodi Matsai, Elana Moolman, Agrippa Stulimani and Wimpie van Lill for valuable research assistance. This paper is prepared for the Economic History Association meetings in Washington D.C. 2 Department of Economics, Stellenbosch University, South Africa. E-mail: [email protected]. 3 Department of Economics, Stellenbosch University, South Africa. E-mail: [email protected]. 1 rather than sudden process, and that early modern market structures were shaped by geography more directly than by political borders’. We ask similar questions of South Africa. The final decade of the nineteenth century and the first of the twentieth century was, according to Charles van Onselen (1982), an ‘extraordinary period of social, political and economic change’ in South African history. The discovery of diamonds in the interior in the early 1870s followed by the discovery of gold on the Rand in the 1880s, transformed the South African interior from a sparsely populated society of Afrikaner agriculturalists to an economy dominated by the mining and finance – and migrant – hub of Johannesburg. The rapid changes in the interior affected the Cape economy too, providing an outlet for produce and support for the transport industry which connected the new centres of production with the international markets. Yet little is known about the integration of regional South African markets during this period. Before the discovery of minerals, transport connections to the two Boer republics were slow, expensive and limited to small consumer goods. The mineral revolution – and the need to not only transport diamonds and gold to the coast, but also the large machinery required on the mines – resulted in the rapid expansion of the railway network and a decline in trade costs. Nevertheless, geographical barriers, notably the vast Karoo and the high altitude of the interior, and political boundaries between the Boer republics and the British Cape, remained costly. Whether the new infrastructure increased market integration for those regions remains uninvestigated. This paper answers two questions: When did South Africa globalise or, in other words, when did South African prices converge on international prices? To answer this we use an annual grain price series from 1837 to 1913 in comparison with similar series from Britain, Europe, the United States and Australia. We find no evidence of integration before the mineral discoveries of 1870, with strong convergence before and after the Second South African War (1899-1902). Secondly, we focus on the period of rapid economic and political change: using an unbalanced, monthly panel of selected years between 1889 and 1914, we calculate the degree of integration within South Africa – notably within the Cape Colony, but also between the Cape and Natal and the two Boer republics, the Orange Free State and the Transvaal. We use techniques standard to the market definition and business cycle literature to also investigate the impact significant political events, notably the Second South African War (1899-1902) and political unification in 1910. 2 WHEN DID SOUTH AFRICA GLOBALISE? Europeans arrived in 1652 at the Cape to establish a small refreshment station under the auspices of the Dutch East Indian Company. The Commander soon realised that trade with the native Khoe would not provide adequate provisions for the passing ships on their route to the East, and therefore released Company servants to become free burghers, starting a process of land acquisition and conquest that continued over several centuries. These settlers moved North and East – engulfing the pastoral Khoe, who dwindled in number due to disease and the superior military and economic power of the settlers – until reaching the agrarian isiXhosa on the banks of the Fish River. Over 143 years of Dutch rule, settler territory and numbers expanded, buttressed by the importation of slaves from the East Indies, to reach roughly 15 000 inhabitants by 1795 when the British first gained control. After a short period of Batavian rule (1803-1806), the Cape Colony became part of the expanding British Empire. The Cape population continued to expand, especially in urban Cape Town, but also on the frontier where pressure for farm land became intense, leading to a series of Xhosa wars, exacerbated by the arrival, in 1820, of British settlers. While small towns dotted the country-side, production was predominantly agricultural. During most of the seventeenth, eighteenth and early-nineteenth centuries, exports were limited to grains and wine. Manufactures were mostly imported. Unhappiness with British rule, including the emancipation of slaves in 1834, caused several thousand frontier farmers of Dutch origin to trek across the Orange River, deeper into the interior. After several years of trekking, two Republics were founded, the Orange Free State in 1854 and the South African Republic in 1856. The Colony of Natal, on the eastern coast, was proclaimed a British colony in 1843. By the 1860s, then, the Cape Colony was the economic hub of a vast, sparsely populated interior. The discovery of minerals in the South African interior substantially altered the economic landscape. The diamond discoveries drew immigrants from the Cape and abroad into the interior in search of riches, founding new towns like Kimberley that, by in the 1891 census, was the second largest town in South Africa. The discovery of gold in the Witwatersrand during the 1880s had an even greater effect. By unification in 1910, Johannesburg was the largest city and economic centre of Southern Africa (according to the 1911 South African Census, 121,857 whites versus 64,619 in Cape Town). 3 Although the Cape was founded by the first multinational company, its inhabitants descended of European settlers and Malayan, Indonesian, Indian, Mauritian, Madagascan and Mozambican slaves (Baten and Fourie, 2012), it is not clear to what extent the Cape Colony was technically globalised or, in other words, whether Cape markets were integrated into the global market. Before the discovery of minerals, export volumes were small and limited to a few commodities; as Figure 1 shows, a strong rise in both exports and imports were experienced after the discovery of diamonds (after 1870), and again after the discovery of gold (after 1885). The Second South African War (1899-1902) had a profound impact on the productive capacity of the economy, reducing exports and boosting imports. By 1909, however, exports had recovered while imports had fallen, resulting in a sizeable positive trade balance. Figure 1: Exports and Imports of goods (excluding specie) from the Cape Colony, 1850-1909 Source: CGH Blue Books (1909). When, then, did South African markets integrate into the global economy? To answer this question, we use annual price data for the Cape Colony (from 1836) and Natal (from 1852), obtained from De Zwart (2013). We compare the South African series with a constructed annual wheat price series for the United Kingdom, the colonial ruler and South Africa’s main trading partner. The UK series was compiled from Jacks (2006) monthly wheat prices for twelve UK cities. The South African series is adjusted to the same unit of measurement, and both series are logged. Figures 2 and 3 present the results. 4 Figure 2: Trends for South Africa and United Kingdom wheat prices, 1836-1913 Figure 3: Medium-term cycle trends for South African and United Kingdom wheat prices, 1836- 1913 5 Figure 2 suggests a clear break around 1872, when exports of diamonds first reached more than £1 million. Before 1872, there seems to be little correlation between wheat prices in South Africa and in the United Kingdom. Yet during the early 1870s, a positive correlation seems to emerge between the two series. This visual inference is supported by measuring the correlation coefficient: between 1836 and 1871 a positive but statistically insignificant correlation of 0.05 is calculated. Between 1872 and 1913, however, a statistically significant, positive correlation of 0.86 is found, suggesting strong co-movement between South African and UK prices.