EC347 Economic Development: The facts Per capita income in the US is currently around $33,000 to $35,000. Median family money income was $39,657 in 1999.

EC347 Economic Development: The facts

Per capita income in the US is currently around $33,000 to $35,000.Median family money income was $39,657 in 1999.

There are significant differences between States.

Alaska, Maryland, New Jersey and Connecticut all have median family incomes around $50,000 a year or higher.

These incomes are almost two times higher than the poorest states of Arkansas ($28,398) and West Virginia ($28,420).

As significant as these differences are ...

The gaps between rich and poor states in the US are trivial when compared to the gaps between rich and poor around the world.

The average person in the US earns ...

48 times what the average person in Angola does.

41 times what the average person in Nigeria does.

14 times what the average person in India does.

9 times what the average person in China does.

Almost 4 times what the average person in Mexico does.

Two big questions ...

What accounts for these large differences between countries and can these gaps be closed through policy? (The focus of this course).

Have there always been such gaps? An equally important question that we discuss today.

Two major books that have been published in the last ten years.

First by looking at Jared Diamond’s Guns, Germs and Steel

Secondly by summarizing the central arguments of Ken Pomeranz’s The Great Divergence

Jared Diamond’s Guns, Germs and Steel.

In the course of the over 400 pages of this book, Diamond makes the following points

(1) That there is no scientific basis in the assumption made (often only implicitly) that economically successful countries are simply populated by more intelligent, industrious individuals.

(2) Many of the building blocks of economic success up to the 18th and 19th centuries (such as a written language and the domestication of plant and animal life) stem from one source.

Finally ...

(3) That economic success is in large part a function of geography. (or at least up to the industrial revolution of the 19th century) In particular, the economically most successful region of the world “Eurasia” was unique in its geographical advantages over the rest of the world.

What’s unique about Eurasia?

First: Its east-west orientation (For spacious skies and tilted axes)

The significance of this is that latitude determines day length and seasonal changes.

Crops developed for a given latitude travel relatively easily along that latitude.

Ease of diffusion

Northern Iran, Japan and Portugal share the same latitude. Although 4000 miles apart they are more suited to growing the same crops than points 1000 miles due south. (if you have ever looked at a seed catalog you’ve noticed that the continental US is divided into several zones following latitude.)

Contrast this with the Americas or Africa

Corn was cultivated in Mexico by 3500 BC.

It took Native American farmers 4400 years to adapt corn so that it grow in the considerably shorter growing season of what is now the eastern US.

By the time of Christ

Cereals, first cultivated in the fertile crescent in 8,000 BCE, were being grown over an 8000 mile expanse from Ireland to Japan by the time of Christ.

And the slide below shows that the process was well underway by 2500 BC

Another advantage: The Anna Karenina principle

“Happy families are alike; every unhappy family is unhappy in its own way”.

Eurasia also had significant advantages over the other two major land masses (Africa and the Americas) in terms of livestock.

In particular, almost half of the suitable condidates for domestication were native to Eurasia.

Mammals suitable for domstication

Diet. 10000 pounds of corn yields a 1000 pound cow. 40000 pounds of corn would be needed to provide the 4000 pounds of meat to feed a 400 pound lion. Omnivores/herbivores beat carnivores.

Growth rate. It takes 15 years for an elephant to reach maturity.

Captive breeding. The case of the cheetah.(males chase female several days to get her to ovulate)

Dispositions. The case of the zebra and the British.

Mammals suitable for domstication (continued.)

Tendency when panic to cluster together

Social structure.

Given these requirements only 14 of the 148 candidates have been successfully domesticated (13 in Eurasia; one, the llama in the Americas, zero in Africa.)

Eurasia therefore had a lot of advantages.

Because of its east-west orientation the spread of new crops was easier.

Because of the NATURE of the large mammals found in Eurasia, the area was able to domestic these animals for food, clothing, power and transportation.

Written language was an added plus that spread from the fertile crescent both east and west(along with crops and livestock)

The industrial revolution: The growth of western Europe over the rest of the world.

There is compelling evidence that as recently as 1750 to 1800, Europeans were no better off than people in many parts of Asia.

In fact

With 60% of the world’s population in 1750 (and 30% of the land area) Asia was responsible for 80% of the world real GDP of 765 billion current dollars. (What does this tell you?)

Even more remarkable, the two most populous less developed countries of today (India and China) produced together almost 60% of all manufactured goods in 1750.

However, by 1900 a lot had changed. India’s share had fallen to less than 2% and China to less

than 7%. The rest of the “West” therefore also marks the decline of

the “East”.

What caused Europe (especially England) to get ahead of Asia?

Traditional arguments concerning China have tended to focus on the success of China politically.

To maintain its control the imperial Chinese government resisted change more strongly. (tradition bound conservative oriental despots and all that)

The poor old ghost of Zheng He (voyages 1405-1433).

Timing is everything

Another argument is that Zheng He lost support because his voyages corresponded to the completion of the Grand Canal.

The Grand Canal provided the infrastructure for a large unified domestic market within China itself.

The Grand Canal made overseas trade (which was very risky anyway) unnecessary.

And India and the rest of the world…? We have all been too ready to attribute the failure of these

economies to keep up to fundamental exogenous “cultural” factors.

(Preferences for large extended families, lack of entrepreneurial drive, unwillingness to take risks, corruption, attachment to tradition and so on.)

As the Solow model teaches us, GIVEN these factors, economies WILL fail to converge (that is, they will grow at different rates and therefore diverge).

What you have learned is that it is foolish to take these “cultural” factors as exogenous.

Arguably historians working in the new field of World History share this basic perspective with new growth theorists. They too are hesitant to put too much emphasis on culture as a determining factor of economic development historically.

World History: The Great Divergence author K Pomeranz .

In this book, Pomeranz argues that that Europe, England especially, possessed a few key natural advantages. These natural advantages far more than culture led to the industrial revolution of the 19th century in England.

Advantage #1: coal

England and Europe’s population grew at a faster clip during and after the 16th century than it had before . This population growth increased the demand for fuel (wood, and its derivative, charcoal).

And in the face of growing demand and limited supply, the price of charcoal rose sharply.

Why was supply limited? As just pointed out, charcoal is made from wood. Making charcoal means

land must be taken away from pasture and growing crops for food or fiber. It is also a very labor intensive product (see Diana Muir, Reflections, pp. 139-140)

It is also a very delicate commodity. Charcoal, needed to fuel iron furnaces, could not be transported any more than 10 to 12 miles (preferably 5 or less) because large chunks of charcoal were needed to make iron and charcoal breaks in transit.

In short, the rising costs of charcoal and wood was due to limited capacity to supply coupled with growing demand. This raised the relative price of charcoal compared to coal and made coal, previously too costly, viable.

Also luckily for England, coal was in abundance close to where it was needed.

Coal (continued)

Turning to coal freed up, conservatively, over 15 of the 17 million acres of land, “arable” land, in England that would have had to have been used for forests to grow the wood to make charcoal otherwise.

In contrast to charcoal

Coal was more easily transported and was a more efficient source of fuel anyway.

Coal: China vs. England.

Although China had huge deposits of coal as well as an understanding of the technology involved in running steam engines, geography was against China.

The lion’s share of China’s coal deposits (61.4%) were and are located in China’s arid northwestern provinces. In England, the problem in coal mining was the tendency of mines to fill with water.

This could easily be handled

by strong pumps to pump out water. These pumps, run by steam engines, were powered by coal.

Application of steam pump technology was quickly applied elsewhere.

(See also spinningtheweb.org.uk)

In China’s arid northwest where coal was found...

water was much less of a problem. Instead spontaneous combustion was a constant threat. It could be solved only by the technically stickier problem of proper ventilation.

Advantage #2: The “New World”

The second key advantage western Europe had (especially England with its vast empire) was the “New World”.

The “New World” further relieved pressures on land resources that built up with population growth in Europe.

In addition to giving Europe the short-cut to Asian markets that Columbus sought (he was looking for geographic short-cut, the “New World” however gave Europe an economic one, precious metals)

The “New World” gave us all the potato. The potato is a crop indigenous to the Americas and provides more calories per acre of land farmed than traditional European grain crops. (less than rice however)

The Americas also made it possible to grow fiber crops such as cotton ...

New World (continued)

that either could not be grown in Europe or could only be grown by taking acres of land away from growing food.

In Asia population grew sharply as well

And for the same reasons as it grew in Europe.This was especially true in China and India.China’s population doubled between 1650 and

1750 while India’s grew by the same percentage amount between 1600 and 1750.

Although both economies began to show the strains of this population growth by the 1800s neither experienced the price inflation that Europe experienced during this same period of 1600-1750 (with lower population growth rates)

Asia’s superior productivity

Asia was arguably so much more productive that by more intensively working existing land (applying more labor to already cultivated areas) and via extension of settlement to new areas it was able to accommodate much higher growth in population.

Necessity “being the mother of invention”, there was more of a need for Europe to push for social and economic change than in Asia.

Europe without coal and the Americas (binding constraints)

Without change (And even with it)

Supply could not rise to meet growing demand in Europe under the biological old regime. (where all that was produced was tied basically to agriculture output, food, fiber AND fuel)

There was therefore pressure to innovate in order to compete with the much more productively and hence cheaply made textiles and ceramics coming to Europe from Asia

Europeans also tried to stem the flood of precious metals to Asia through piracy and trade restrictions.

Asia (less binding constraints)

So even under the biological old regime that ruled the entire world until 1500

Supply rose to meet growing demand in Asia for quite some time without a change in technology being necessary.

And while the growing population of Asia

Saw its free peasantry move off into new less and less productive lands and turn to a mixed economy of self-sufficient agriculture for food, fiber and fuel crops.

(This limited the supplies of food and fiber crops that these areas used to export to textiles centers in exchange for cloth.)

The growing population of Europe

Was clothed by slaves in the US and the Caribbean. Unlike the free peasantry of Asia, slaves were forced to specialize in crops like cotton. Cotton was then spun into cloth by the coal burning textile mills of Europe.

At the same time tenants in Ireland and colonists in the Americas helped feed the English by supplementing food supplies in England and the Carribean.

And trade policies, wherever possible, favored the import of factory made cloth and machinery from the rising industrial center of England to increasingly weaker economies.

In summary:

The Eurasian land mass had natural advantages over the Americas and Africa.

Although economically unremarkable until the “age of discovery” the far end of Europe (England in particular), was able to break out of the tangle of poverty and lock-in effects before anyone else with the help of coal, colonies and the exploitation of economically disadvantaged peoples of the Americas and Africa.