Lecture 4 - The Great Divergence PDF

Economic History The Great Divergence Felix Ward Erasmus University Rotterdam 1/55 The Great Divergence The Industrial Revolution begins in C18th Britain In some world regions the transition to modern economic growth occurs soon thereafter (Western Europe, North America) In many other regions th...

Economic History The Great Divergence Felix Ward Erasmus University Rotterdam 1/55 The Great Divergence The Industrial Revolution begins in C18th Britain In some world regions the transition to modern economic growth occurs soon thereafter (Western Europe, North America) In many other regions the onset of modern economic growth is delayed by many decades and even centuries ⇒ The Great Divergence The main reason why incomes today differ widely across the globe 2/55 Today’s topic: What explains the Great Divergence? GDP per capita (in 2011 international USD) Source: Maddison Project Database 2020 (Bolt and van Zanden, 2020) 3/55 All regions have transitioned to modern economic growth... GDP per capita (in 2011 international USD) ... but some with a considerable delay Source: Maddison Project Database 2020 (Bolt and van Zanden, 2020) 4/55 1 The ascent of the rich 2 Import competition and deindustrialization 3 Modernization challenges 4 Poverty traps 5 Deep root problems 5/55 The ascent of the rich GDP per capita (in 2011 international USD) After Britain, Western Europe and North America are the first regions to transition to modern economic growth Source: Maddison Project Database 2020 (Bolt and van Zanden, 2020) 6/55 The standard model of development Like Britain, Western Europe and North America had accessible coal and relatively high wages They could thus profitably adopt Britain’s new labor-saving technologies after micro-innovations had improved their efficiency In addition, countries made a deliberate effort to catch up with Britain by employing the standard model of development: 1 Railways: integration of domestic market 2 Schools: promotion of mass education 3 Banks: finance industrialization 4 Tariffs: protection of domestic industry 7/55 In the mid-1800s Germany’s railway system is still fragmentary Germany, 1842 Britain, 1850 Weigelt, Horst. 2010. Von den Anfängen der Eisenbahn bis zur Glanzzeit deutscher Länderbahnen – ein Überblick. Eisenbahntechnische Rundschau, 12/2010. Schwartz, Robert et a. 2011. Spatial history: railways, uneven development, and population change in France and Great Britain. Jounral of Interdisciplinary History, 42(1). 8/55 By 1880 Germany’s railway network has caught up with Britain’s Germany, 1880 Britain, 1880 9/55 Europe-China comparison: early C20th railway networks Europe, 1930 China, 1936 Martí-Henneberg, Jordi. 2021. From state-building to European integration: The role of the railway network in the territorial integration of Europe, 1850-2020. Social Science History, 45. Wang, Jiaoe et al. 2009. Spatiotemporal evolution of China’s railway network in the 20th century: An accessibiity approach. Transportation Research Part A, 42(1). 10/55 Mass education quickly spread in the West Figure: Share of children of primary school age who are in primary school Source: Lee and Lee (2016) https://ourworldindata.org/global-education 11/55 Tariffs were comparatively high in the West Tena-Junguito, A. et al. 2012. How much trade liberalization was there in the world before and after Cobden-Chevalier? The Journal of Economic History, 72(3). 12/55 Why was tariff protection a peculiar Western characteristic? Tax systems of eastern empires predominantly land-based (Ottoman Empire, China), not trade-based as in Europe Europe: small countries ⇒ high external trade-ratios Eastern empires: large empires ⇒ low external trade-ratios Mercantilist tradition in Europe Military imbalance emerges in the C19th Asymmetric free trade treaties in exchange for military support (Anglo-Ottoman Treaty 1838) Free trade militarily imposed (Opium wars, 1839-42 & 1856-60) Gunboat diplomacy (Opening of Japan, 1853/54) Colonial empires: colonies had no tariff autonomy (India, Africa, Southeast Asia) 13/55 1 The ascent of the rich 2 Import competition and deindustrialization 3 Modernization challenges 4 Poverty traps 5 Deep root problems 14/55 Import competition and deindustrialization Industrial Revolution arrives in the form of import competition, rather than through diffusion of modern production technologies In contrast to the West, little tariff protection for domestic proto-industries Geographic misfortune: distance between pre-modern manufacturing centers and coal While the Industrial Revolution spreads within the West, de-industrialization1 becomes the dominant force in many other parts of the world 1 Lewis, Arthur. 1978 [2015]. The evolution of the international economic order. Princeton University Press 15/55 Cotton textile industry: Anglo-Indian comparison In 1680: British cotton textiles cost 2x as much as Indian cotton textiles And British wages were 4x higher than Indian wages ⇒ British cotton textile industry was uncompetitive, but survived behind protective tariffs By 1820: British cotton textiles cost half the price of Indian cotton textiles Although British wages were 5x higher than Indian wages ⇒ Most of this reversal was due to a 3-fold increase in British TFP Broadberry, Stephen and Bishnupriya Gupta. 2009. Lancashire, India, and shifting competitive advantage in cotton textiles, 1700–1850: the neglected role of factor prices. The Economic History Review, 62(2). 16/55 Western textiles begin to dominate world markets OTTOMAN DE-INDUSTRIALIZATION 167 Table 1. Comparative de-industrialization: textile import penetration, 1800s–80s, around the Third World % of home textile market supplied by: Foreign imports India, 1800 India, 1833 India, 1877 Ottoman Empire, 1820s Ottoman Empire, 1870s Ottoman Empire, 1910s Indonesia, 1822 Indonesia, 1870 Indonesia, 1913 Mexico, 1800s Mexico, 1879 -6 to -7 5 58–65 3 65–75 74–80 18.1 62 88.6 25 40 Domestic industry 106–7 95 35–42 97 25–35 20–6 81.9 38 11.4 75 60 Sources: Williamson, Trade and poverty, tab. 5.3, for all but Ottoman Empire observations, which are calculated from Pamuk, Ottoman Empire and European capitalism, p. 115. ⇒ East’s comparative advantage shifts to primary goods production ! Bulgaria declined by more than 40 per cent from the 1860s to the first decade of the twentieth century.37 Table 1 offers anotherJeffrey de-industrialization indicator for the 1800-1913: nineteenth-century Pamuk, Sevket & Williamson, G. 2011. Ottoman de-industrialization, Assessing Ottoman Empire, comparisons with the Review, rest of 64(1). the Third World are offered. the magnitude, impact,where and response. Economic History For four Third World regions—Mexico, the Ottoman Empire, India, and Indonesia—we measure the loss of domestic textile manufactures markets to foreign imports. That is, the figures report the share of domestic consumption 17/55 The Great Specialization ! Yates, Lamartine. 1959. Forty years of foreign trade: A statistical handbook with special reference 2009 to primary products and under-developed countries. MacmillanFindlay/O’Rourke Co. pp.227-30 18/55 Great Specialization, Deindustrialization, Great Divergence New Economic Geography (NEG) models explain the joint occurrence of trade specialization and income divergence through increasing returns to scale and agglomeration effects1,2 Core-periphery pattern: If region A specializes in production with increasing returns (e.g. manufacturing) and region B in constant returns production (e.g. primary goods), region A will grow faster than region B (which deindustrializes) C19th transportation costs plummet (steamships, railways) ⇒ Great Specialization ⇒ Great Divergence 1 Fujita, M., P. R. Krugman, and A. Venables. 1999. The spatial economy: cities, regions, and international trade. The MIT Press. 2 von Thünen, J.H. 1826 [2009]. The isolated state in relation to agriculture and political economy. Springer. 19/55 The Great Divergence begins GDP per capita (in 2011 international USD) Source: Maddison Project Database 2020 (Bolt and van Zanden, 2020) 20/55 Caveats to the deindustrialization thesis Counterexamples: Several regions transitioned to modern economic growth while specializing in primary production (e.g. Australia, Canada) Terms of trade effects: Manufacturing growth in the industrial core regions could become an engine for growth to many primary goods exporters Rising global raw material demand increased raw material prices Glut of manufacturing goods churned out by European factories led to a decline in the price of manufactures Timing: Per capita incomes in China and India had been falling long before Western import competition began 21/55 Long-run decline in China de Zwart, Pim and Jan Luiten van Zanden. 2018. The origins of globalization: World trade in the making of the global economy, 1500–1800. Cambridge University Press. 22/55 Long-run decline in India Broadberry, Stephen, Johann Custodis, and Bishnupriya Gupta. 2015. India and the great divergence: An Anglo-Indian comparison of GDP per capita, 1600–1871. Explorations in Economic History, 55. 23/55 Terms of trade effects benefitted primary good exporters ⇒ Periphery could tap into global commodity demand boom Williamson, Jeffrey G. 2008. Globalization and the Great Divergence: terms of trade booms, volatility and the poor periphery, 1782–1913. The European Review of Economic History, 12. 24/55 Examples of primary producers transitioning to modern growth GDP per capita (in 2011 international USD) But China and India were no frontier economies: ecologically badly positioned to benefit from primary goods demand boom Source: Maddison Project Database 2020 (Bolt and van Zanden, 2020) 25/55 1 The ascent of the rich 2 Import competition and deindustrialization 3 Modernization challenges 4 Poverty traps 5 Deep root problems 26/55 Technology transfer challenges: Japanese agriculture Japan is the only East Asian economy to transition to modern economic growth in the C19th (though late) It applies the standard model of economic development But: no tariff autonomy due to U.S. gunboat diplomacy (1853/54) Meiji Restoration (1868): Japan makes deliberate effort to modernize Imports U.S. agricultural technology ⇒ Failure U.S. technology ill-adapted to Japan’s low land-labor ratio 27/55 Why was U.S. agricultural technology not very useful in Japan? C19th U.S.: high land-labor ratio (25 hectare/person vs. Japan 0.72) ⇒ High wages induce labor-saving mechanization, i.e. big farming machines (Habbakuk thesis)1 ⇒ These machines work best on large tracts of plain fields Japan’s next trial: land-saving biological and chemical innovations Fertilizers and improved plant varieties ⇒ Success. Per capita agricultural output rises 1 Habakkuk, Hrothgar John. 1962. American and British technology in the nineteenth century: the search for labour saving inventions. Cambridge University Press. 28/55 The Hayami-Ruttan thesis Hayami-Ruttan: Different endowments require different technologies Output per capita can be increased in different ways: Y/L = Y/A · A/L Land-abundant U.S.: machines increased Y/L by increasing the land area each worker could farm, A/L Land-scarce Japan: bio-chemical technology increased Y/L by increasing the output per hectare, Y/A Hayami, Y. and V. W. Ruttan. 1970. Factor prices and technical change in agricultural development: the United States and Japan, 1880–1960. Journal of Political Economy, 78(5). 29/55 The Hayami-Ruttan thesis Differences in initial factor endowments can give rise to multiple paths of technological development Transition to modern economic growth often requires the capacity to innovate, rather than copying of existing technologies 30/55 Institutional transfer challenges Djankov et al. (2003): institutions are endogenous choice that a society makes to navigate between two undesirable extremes Anarchy: High private expropriation risk Despotism: High state expropriation risk A society’s trade-off between these two extremes depends on its institutional possibility frontier (IPF) Factors determining a societies IPF: civil society/social capital, conflict resolution capacity, ethnic fractionalization etc. Djankov, S. E. Glaeser, F. La Porta, F. Lopez-de-Silanes, and A. Shleifer. 2003. The new comparative economics. Journal of Comparative Economics, 31. 31/55 Institutional possibility frontier and optimal institution choice e.g. Land use disputes Private orderings: citizens settle disputes themselves (Anarchy) Anarchy risk: disputes can turn violent leading to anarchy Despotism risk: absent strong state, no state expropriation risk .. . State ownership: government official adjudicates disputes Anarchy risk: strong state squashes private anarchy (Despotism) Despotism risk: citizens can be expelled from land based on autocratic caprice 32/55 Institutional possibility frontier and optimal institution choice Social losses due to private expropriation (Anarchy) Flat IPF (e.g. high social capital) Steep IPF (e.g. high crime rate) liberal light touch liberal illiberal heavy handed illiberal Total loss minimization 45° Social losses due to state expropriation (Despotism) Different societal fundamentals ⇒ different institutions minimize social losses due to private and state expropriation 33/55 Institutional possibility frontier and optimal institution choice e.g. Rwanda: steep IPF due to history of ethnic conflict Social losses due to private expropriation (Anarchy) Independent judges may increase expropriation risk if judges manifest a preference for their own ethnic group Independent judges Caveats: How fundamental is the anarchy-despotism trade-off? The good society Dependent judges Social losses due to state expropriation (Despotism) ⇒ Why not focus on measures that shift the IPF inwards? E.g. foster broader ethnic identities1,2 Can be misused to interpret any despotic government as optimal 1 Sen, Amartya. 2007. Identity and violence: the illusion of destiny. New York: W.W. Norton & Co. Fukuyama, Francis. 2018. Identity: the demand for dignity and the politics of resentment. Farrar, Straus and Giroux. 2 34/55 1 The ascent of the rich 2 Import competition and deindustrialization 3 Modernization challenges 4 Poverty traps 5 Deep root problems 35/55 Increasing returns and multiple equilibria y )*+,-*. /,012,23 s = σ $ %(') k Poverty traps can delay the transition to modern economic growth 36/55 Poverty traps and Big Push policies Examples of poverty traps: No infrastructure ⇔ No economic activity No savings ⇔ No income growth No steel mill ⇔ No coal mine Transition to modern economic growth may require a Big Push Gerschenkron thesis1 : late-industrializers may require greater state initiative to overcome missing prerequisites Heavy government involvement in C20th East Asian industrialization often interpreted in this way 1 Gerschenkron, Alexander. 1962 [2005]. Economic backwardness in historical perspective. in: The Political Economy Reader: Markets as Institutions. Eds.: Roberts, J.T., A. B. Hite, and N. Chorev. Wiley Blackwell. 37/55 Big Push policies )*+,-*. /,012,23 y s = σ $ %(') Big Push k After the Big Push rapid transitory growth sets in 38/55 East Asian convergence GDP per capita (in 2011 international USD) Sudden transition to rapid catch-up growth after 1950 Source: Maddison Project Database 2020 (Bolt and van Zanden, 2020) 39/55 Caveats Big Push policies often rely on close informal relations between government, banks, and firms → corruption risk Relation-based system difficult to maintain as economy grows → Transition from relation-based system to rule-based system1 The Soviet Union and the limits of central planning Central planning could cope with mass production technologies2 But failed to keep up with frontier developments in late C20th: mass customization, application of ICT3 Examples of Big Pushes gone wrong: Stalinist industrialization (USSR, 1920s-1930s), Great Leap Forward (China, 1958–62) 1 Li, John Shuhe. 2003. Relation-based versus rule-based governance: an explanation of the East Asian miracle and the Asian crisis. Review of International Economics, 11(4). 2 Allen, Robert C. 2003. Farm to factory: a reinterpretation of the Soviet Industrial Revolution. Princeton University Press, Princeton. 3 Broadberry, Stephen and Alexander Klein. 2011. When and why did eastern European economies begin to fail? Lessons from a Czechoslovak/UK productivity comparison, 1921–1991 40/55 Soviet TFP flatlines in the 1970s Total factor productivity, USSR: Allen, Robert C. 2003. Farm to factory: a reinterpretation of the Soviet Industrial Revolution. Princeton University Press, Princeton. 41/55 1 The ascent of the rich 2 Import competition and deindustrialization 3 Modernization challenges 4 Poverty traps 5 Deep root problems 42/55 Back to the deep roots of economic growth To the extent that deep root factors are determinants of the transition to modern economic growth they might also help us to better understand the Great Divergence Severe deficiencies in one or more of the deep roots may have contributed to delaying the onset of modern economic growth in some regions Which regional differences in geographic endowments, institutions, culture,... can explain the Great Divergence? 43/55 Geography: The California School The California School1 argues that leading regions in China and Europe were very similar except for two geographic pecularities Europe Abundant supply of accessible coal New World resources complement European industry (e.g. cotton)2 China Yangzi valley (major population center) very far from coal No access to periphery resources to complement its industry Ecological constraint in China itself already binding ⇒ Europe industrializes, China does not 1 2 Pomeranz, Kenneth. 2000. The Great Divergence. Princeton University Press. Beckert, Sven. 2015. Empire of cotton: a global history. Vintage. 44/55 The California School Other input factors New World windfall shifts Europe’s endowment to EEU !"#$ > 0 + '() + #$ Perfect complements: Industrial production IP only gets going with the complementary New World resource Caveats: Lower Yangzi imported similar amounts of cotton from India as Britain did from America !"'() = 0 New World resource Europe sourced raw materials from elsewhere too How crucial were colonial goods (cotton, sugar, coffee, cocoa) to Industrial Revolution? 45/55 Institutional legacy effects: different colonization policies Extractive states in regions with high European mortality rates No checks and balances, little protection of property rights ⇒ Bad for long-run growth (e.g. much of Africa, Latin America) Neo-Europes in regions more hospitable to European settlement Checks and balances, protection of property rights ⇒ Good for long-run growth (e.g. Australia, U.S., Canada) AJR (2001)1 : these institutional differences persist and account for more than half of today’s income differences 1 Acemoglu, D. S. Johnson, and J.A. Robinson. 2001. The colonial origins of comparative development: an empirical investigation. American Economic Review, 91(5). 46/55 Caveats European settlers did not just bring their institutions with them: Hard to clearly identify institutional effects and separate them from cultural factors and human capital effects1 Bad disease environments also affects native populations: Some geographies come with higher disease burden than others Sachs (2003) shows that when accounting for present-day Malaria risk the size of the institutional effect estimate by AJR (2001) halves2 1 Glaeser, Edward L., Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer. 2004. Do institutions cause growth? Journal of Economic Growth, 9(3). 2 Sachs, Jeffrey. 2003. Institutions don’t rule: direct effects of geography on per capita income. NBER Working Paper 9490. 47/55 Cultural and institutional legacy effects: African slave trades Ethnic groups that were more severely affected by the Atlantic and Indian Ocean slave trades (C15th–C19th) today still have lower levels of trust in relatives/neighbors/local officials1 and lower per capita incomes2 Enslavement through 1 tricking & selling 2 raiding & capturing 3 instrumentalized judiciary      trust ↓ ⇒ transaction costs ↑ development E Low trust is transmitted across generations internally (e.g. family norms) and externally (e.g. institutions) 1 Nunn, Nathan. 2008. The long-term effects of Africa’s slave trades. The Quarterly Journal of Economics, 123(1). 2 Nunn, Nathan. and Wantchekon, Leonard. 2011. The slave trade and the origins of mistrust in Africa. American Economic Review. 101(7). 48/55 Low versus high slave export countries’ GDP growth Nunn, Nathan. 2008. The long-term effects of Africa’s slave trades. The Quarterly Journal of Economics, 123(1). 49/55 Cultural barriers to knowledge diffusion in India? Roy (2008) argues that informal institutions in C19th India were hindering knowledge diffusion across social groups1 Artisanal knowledge was controlled by kin-based collectives with strong barriers to entry Little communication occurred across occupational groups ⇒ Insular knowledge Example: Would have been uncommon for master carpenters to directly interact with weavers to construct custom-made new loom 1 Roy, Tirthankar. 2008. Knowledge and divergence from the perspective of early modern India. Journal of Global History, 3. 50/55 Weaving equipment made by specialists Linen weaving and warping, eighteenth-century Ireland; painting by W. Hincks 51/55 Weaving equipment made by weavers themselves Sari weaving, western India, c. 1873; photography by Shivashankar Narayan 52/55 Engerman-Sokoloff thesis: geography meets institutions Latin America’s geography suitable for plantation crops (e.g. sugar). Scale economies (e.g. processing) favor large slave plantations ⇒ Inequality in wealth, education, and political power ⇒ Exclusive institutions restrict commercial opportunities to small elite (voting rights, access to land auctions, ...) North America’s geography more suitable for grain farming No scale economies ⇒ more egalitarian ⇒ Inclusive institutions Example: Regional governments in Latin America dominated by landed interests unwilling to fund public primary schooling ⇒ low literacy rates well into C20th Sokoloff, Kenneth L. and Stanley L. Engerman. 2000. History Lessons: Institutions, factor endowments, and paths of development in the New World. Journal of Economic Perspective, 14(3). 53/55 Land concentration and human capital in the U.S., 1900–1940 Galor, Oded, Omer Moav, and Dietrich Vollrath. 2009. Inequality in landownership, the emergence of human-capital promoting institutions, and the Great Divergence. The Review of Economic Studies, 76. 54/55 Summary History shows that the transition to modern economic growth can be fraught with difficulties Core-periphery patterns can generate divergence Modernization challenges need to be overcome Poverty traps need to be escaped Deep root problems need to be remedied The resulting delays in the transition to modern economic growth have given rise to the Great Divergence Nevertheless, over the past two centuries all world regions have managed to transition to sustained p.c. income growth 55/55