Robert C. Allen, Global Economic History: A Very Short Introduction

Abstract

https://www.youtube.com/watch?v=B72-3VTlU14 Why are some nations poor and some rich Per capita incomes 1500-present 1500: difference rich and poor countries is little 1800 (IR): gap is widened, 4x richer than poorest countries, first divergence 1820-today: gap explodes, 20x higher incomes riches compared to poor countries, poor countries have got a bit richer Few exceptions: Japan, s Fundamental cause economic growth: technological change and capital intensity U3 determinants of economic success: - technology - poverty trap. Rich countries: more capital per worker, poor countries: labor is cheap so it doesn't pay to substitute capital for labor - globalisation. Amplifies technology differences: further industrialisation rich and deindustrialisation poor countries - economic policy; way countries response or use policy effectively or ineffectively Differs from common economic explanations: culture, political institutions, property rights, scientific knowledge. But these don't explain why Britain. Differences due to cultural deficit or bad institutions, but economic system of free market has responsibly/is important contributor to economic inequality. First divergence: 1500-1800 Columbus – IR First globalisation. Starts with Americas and voyages, EN and DU are big winners. + Energy revolutions  basis industrialisation Consequence: specific kind of economy in GB: high wages compared to other countries and low energy prices. Low energy prices lead to technology. Before industrial revolution West European is richer than rest of the world. In fact this is the cause of the IR, as wages are higher. Wages are high in GB relative to the cost of capital. Gives business the incentive to use more capital intensive technologies. English coal industry produced cheapest energy in the world, also fosters the industrial revolution by providing cheap fuel.  Machinery uses capital and energy to increase productivity of labor. Both cheap in GB, that's why the IR is in Britain. Capital intensive vs labor intensive technologies. Same goes for energy, energy that saves on capital or not. First idea about first divergence and globalisation. Starts with empire formation, leads to export boom, leads to high wages and cheap energy. Technology that uses a lot of capital and energy leads to IR in GB. Second divergence 1820-present, income differences exploded Causes: interplay between technology, globalization and economic policy Some exceptions: e.g. Taiwan, South-Korea, Japan Important feature: processes industrialisation and deindustrialisation 1750 China and India biggest manufacturers in the world Chinese and Indian share collapse (economies are deindustrialised), at the same time EN, Western Europe and America industrialise Technology West became west by technology that increased labor productivity. Cycle of prosperity; higher wages investment more capital intensive. Also larger scale. Technology not cost-effective in poorer countries. Graph: world production function that represents the technological options of all countries. Technology has changed in a particular way. Improvements/changes at high capital per worker, no improvements at low capital per worker in technology. Only countries that where rich in 1965 improved technologies. Same stories of industrial revolution: rich countries inventing machines that have more capital per worker and get more output per worker (like textile machinery) Has been the case since IR Other features: new technologies don't pay in poor countries, only pay where wages are high, all done in response to high wages Graph economic histories of GE, US, UK: Historical pattern by which rich countries got rich; more capital and more output per worker, but flattens out. Exactly the same as technological options to day, the technology always invented by rich countries. Operate with certain capital labour rational, invent technology for higher ratio. The poorest countries gained nothing from technological progress for 200 years. Use antique technology. Trap: poor countries need capital intensive technology to get rich, but it doesn't pay any body to install it. Don't adopt technologies because of cultural deficit/entrepreneurial failure or mind set or because it doesn't pay (wage level)? Globalisation Integration has huge impact on economic development: comparative advantage becomes more important. Specialize where you can be relatively efficient. General equilibrium argument: China and India cotton in 1750, machines made Britain cost effective producer, competition destroyed production in China and India. Reason that Britain got big is that they concentrated world's consumption into their factories. Price of cotton same in countries = market integration; better transport, end of trading monopoly. Price of GB goes down, price Indian market also goes down. 1820's; GB is cheaper even in India because of mechanisation. So it pays to ship from GB to India instead of the other way around. While manufactory sector in India collapses under influence of competition, demand of raw cotton (agriculture) increases >Agricultural economy instead of manufactory economy. ‘Traditional societies' not agricultural, have been great manufacturers but this has been undone by technology and globalisation. How can poor countries catch up? Policy response Europe and North America. Four imperatives: - create a unified national market by eliminating internal tariffs and constructing infrastructure - erect an external tariff to protect your industries against British competition until you figure out how to import or invent technologies - develop a banking system to stabilize the currency and in some cases directly finance industrial development - mass education so ppl can work effectively in industrial environment Why did other countries in Asia, Africa etc. do the same? Colonies could do little, subordinated at imperial power. --- Clip 4 --- Half-hearted policy in Latin-America and Russia. Fundamental reasons standard economic model didn't work in Latin America. Size of efficient in 1960s than 1860s. Canada also adopted model. Market size and scale are important issue. Created a much larger market (as opposed to Argentina). How can poor countries catch up? Answer: grow very fast, target is a moving target Some countries moved very fast - Some countries because of presence of found oil or diamond - Cities states of Hong Kong and Singapore not useful, unusual as they are city states - Relevant: Taiwan, Thailand, China. Countries with big agricultural sectors, big push of industrialization >institutional explanation. All investments require faith that complementary investments are going to occur >need coordination of investment activity. China: example of big push. Uses a lot of planning. Summary: lessons of history Free trade and open markets have never been followed by large successful countries. Comparative advantage has led to under development and not progress. Building up domestic technology capabilities and savings has been more successful than relying on foreign investment. To catch up to the west growth has to be very fast for two generations and that requires planning, investment, technology and education.