A Short History of Economic Development I

Economic Development is New, Starting Around 1750

The world we’ve seen is divided, is startlingly so, between some very rich countries and some very, very poor countries. A billion people roughly live in the high income world. Another billion, roughly, that live in the poor countries, the low income world. And then another 5 billion, 5 7ths of humanity are in between, in the middle income countries. How did this vast difference unfold? How is it that we have countries like the United States, or some even richer at $50,000.00 per person, per year of income or higher? And some countries like Mali, or Malawi, or Niger at under $500.00 per person per year, less than 100th the income levels of the high income countries? We certainly didn’t start this way a couple of centuries ago. If you look back to the period just before the great take off of modern economic growth, just before what we call the industrial revolution, the world was fairly equal. Equal in poverty. Just about every part of the world was rural. Just about every part of the world had its population and its workforce engage in trying to stay alive as peasant farmers. Small herd of farmers eking out a survival. When it was a bad season, bad rains, heat wave, drought people not only suffered, they died. And that kind of extreme poverty was pervasive. It was everywhere in the world. It was in Europe, as well as in Africa. The world was in a condition of not complete but nearly complete equality but equality of poverty. The story of today’s inequality therefore is also the story of modern economic development what has been called the era of modern economic growth. That’s the period since the start of the Industrial Revolution when some parts of the world were able to experience sustained increases of gross domestic product per person. So much so that they transformed themselves from rural to urban, from peasant agriculture to modern industry and, increasingly these days, to a modern, high tech, knowledge intensive, information and communications technology intensive, service economy. How did this happen? And why did it happen in some places in the world, but obviously not in all parts of the world? In such a way that by now, we have these vast inequalities. What it means is not that, today’s poor countries got poorer over time. From two centuries ago they started poor and by and large, they remained poor. Other parts of the world started poor and by today are very rich. We need to understand the nature of that economic growth. And of course why it has varied so much across the world. And what can be done to unlock that economic growth in today’s low income and especially today’s least developed countries. All this takeoff of modern economic growth, the Industrial Revolution and all that followed, is a new event from the point of view of human history. Humanity, our species, best guess, we’re 150,000 years as Homo sapiens. We are about 10,000 years as civilized Homo sapiens, meaning living in communities dependent on sedentary agriculture rather than as nomads hunting and gathering. So the neolithic revolution which brought us agriculture is about 10,000 years ago. But for a very long time, from the advent of agriculture into the Industrial Revolution itself, progress was very, very gradual, almost imperceptible. We see that very starkly in the depiction, as best it can be estimated, of the growth of the world economy. Have a look at this graph. The line of the world output is essentially flat, nearly at zero, for thousands of years. We show it from 1 AD. Until a take off and when you look at that graph you see the takeoff turn up just begins around 1750. And then it shoots up if we are looking at the total production for the world til today. And that vertical line continues because world economy continues to grow very, very strongly today even if as we have come to expect at different rates in different parts of the world. When you think about the total output of the world, which is the sum of the gross domestic product in each country, we can think of that as having two parts. One is the output per person in the world times the number of people in the world. And so when we ask the question, why did the world economy take off around 1750? Was it due to rising output per person, or was it due to a rise in the number of people? We can say yes. What do I mean by yes? I mean both. Both factors have played a huge role, and strangely enough, nearly simultaneously. The world population went up and down by small amounts for 2,000 years, roughly half a billion people, on the planet. In bad periods like The Black Death the numbers would come down. In good periods the population would increase. But it was very stable, fluctuating around a narrow range. Starting in the middle of the 18th century just like the picture for the total world output when we’d look at the picture for the world population, it just turns steeply upward. Well, it’s obviously related to the fact that because of changes in the economy, changes of know how, more people could be supported because more food could be grown. There was more output per person as well rising productivity. Economic growth in the sense of a rise of gross product per person. We see it again nearly flat imperceptible changes for century after century. Starting around the middle of the 18th century, just as with the population and with the size of the overall world economy, that graph shoots upward. Suddenly, the world shows a sustained and significant increase decade after decade in the output per person. Of course I have to caution, these are estimates, from various kinds of evidence, of what the world looked like before 1750. But it was not a world of economic growth. It was not a world of wealth and poverty. It was a world of poverty. It was a world that could produce great monuments beautiful treasures for human history. Like Notre Dame Cathedral and so many splendid architectural triumphs around the world. The Great Wall of China or Hagia Sophia in Constantinople today’s Istanbul. But it was a world in which most people lived difficult lives, scratching out an existence, trying to grow enough food to survive season by season. One of the greatest economists of a modern history one of the leading thinkers of the 20th century, John Maynard Keynes, wrote a quite remarkable description of this long, long period of near stasis. Near stability and unchanging technology from the time of the Roman Empire until the onset of the Industrial Revolution. And I’d like to quote from one of his great essays, Economic Possibilities for our Grandchildren, written in the great depression of the last century, saying how powerful technology can be to help humankind improve its lot. Keynes wrote, and I’m quoting, from the earliest times of which we have the record, back say to 2,000 years before Christ, down to the beginning of the 18th century there was no very great change in the standard of life of the average man living in the civilized centers of the earth. Ups and downs, certainly. Visitations of plagues, famine and war, golden intervals. But no progressive violent change. This slow rate of progress or lack of progress was due to two reasons, to the remarkable absence of important technical improvements and to the failure of capital to accumulate. The absence of important technical inventions between the pre-historic age and the comparatively modern times is truly remarkable. Almost everything which really matters and which the world possessed at the commencement of the modern age was already known to man at the dawn of history. Language, fire, the same domestic animals which we have today. Wheat, barley, the vine and the olive, the plow, the wheel, the oar, the sail, leather, linens and cloth, bricks and pots, gold and silver, copper, tin and lead, and iron was added to the list before 1000 BC. Banking, statecraft, mathematics, astronomy, and religion. Keynes’s point is technology is crucial. And for a very long period technology was relatively unchanging to the point that one could have taken a farmer from Roman times, and if possible through a time machine, put them down in England at the beginning of the 17th century. And they would have felt pretty much at home. [SOUND] Same techniques, similar living standards a world that would have looked quite the same over a span of 17 centuries. But then dramatically everything changes and that is our next subject. To understand the Industrial Revolution, how it began and how it changed human history and human destiny.


A Short History of Economic Development V

Economic Development Since World War II: The Making of Globalization

Modern economic growth took off in the middle of the 18th century, and like the ripples on a pond after a stone has fallen into the water, the ripples of economic growth spread to other parts of the world through the 19th century. The closer to the epicenter of the Industrial Revolution, the closer to England, the faster were countries to receive that ripple, to take off on their own, and escape from extreme poverty. The more that countries were proximate to ports the more that they could trade internationally, the better their climate, the more productive their agriculture. All of these were conducive to a faster takeoff into modern economic growth. And of course politics played an enormously important role. Independence and sovereignty was essential for modern economic growth in the 19th century. Those countries that were unfortunate to succumb to imperial rule did not have the basis for economic takeoff because the imperial powers, typically the European imperial powers, weren’t very much interested in educating the population, building the kind of infrastructure needed for their own industrial take off. Instead they were interested in seeing their colonies as places for primary commodities to build the home industry. And the result is that by the beginning of the 20th century, one could say the following. First, it was a miraculous age because waves of technological change had led to unprecedented breakthroughs in the ability of humankind to produce, to meet material needs, to extend life to, solve long-standing problems of public health, to make breakthroughs in transport, in quality of life in so many ways through electrification, modern transportation, mass industrial production. It was already an age of huge variation between the rich and powerful on the one side and the poor and vulnerable on the other side. Modern economic growth had come to Europe. It had come to the lands of new settlement, the United States and Canada, Australia, and New Zealand. It had spread to other places mainly in the temperate zones of the world like Argentina, Uruguay, Chili. It had not spread to Africa. It had not spread to much of Asia which was under the pressures of European imperial rule. None-the-less, it was a most remarkable age. And as you know, I’m such a fan of John Maynard Keynes because of the power of his economic and political vision in the 20th Century. But one of the things he wrote about this age is worth us recalling. At the end of World War One, he looked back to the period just before World War One, and described this unique global circumstance. He said, and I’m quoting from his famous work, The Economic Consequences of the Peace. What an extraordinary episode in the economic progress of man, that age was which came to an end in August 1914 with World War One. He writes, the inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole Earth in such quantity as he may see fit, and reasonably expect their early delivery upon his doorstep. He could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world and share without exertion or even trouble, in their prospective fruits and advantages. But most important of all, writes Keynes, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it is aberrant, scandalous, and avoidable. Of course, Keynes was speaking as an Englishman, and a quite brilliant and privileged Englishman. He was the one sitting in bed, sipping his tea, and ordering commodities from all parts of the world. Those under colonial rule could not do so. But he was also expressing the uniqueness of an age where modern economic growth had broken out and had taken hold in many parts of the world and had created a global economy. But, of course, that economy came crashing apart tragically, unexpectedly, with the onslaught of World War One. Such a destructive war that historians still today, a hundred years later, are trying to figure out what could have caused that, because there were no deep motives for that war. That war was massively destructive. It unleashed chaos, deaths from violence of course, epidemic diseases such as the flu epidemic at the end of the World War One. It unleashed the Bolshevik Revolution that gave birth to Soviet era communism. It unleashed a tremendous economic forces that led to huge instability in the 1920s. And it played a key role, though complex role, in the onset of  the Great Depression in 1929. And of course, that depression gave rise to horrific political forces, none other than the rise of Adolf Hitler. In January, 1933, in the rise of fascism and thereby the birth of the second devastating world war that which broke out in Europe in 1939 and in Asia, lead by Japan the industrial power of Asia around the same time to create a truly world war. By 1945, technology had continued to advance, but many of the technological leaders were in ruins, though they would quickly rebuild. One technological leader, the world’s technological leader was not in ruins, because other than one attack on Pearl Harbor it was not directly touched in its own territory by the war. That of course, was the United States which far and away by the end of World War Two was the world’s leading economy, the most powerful, the technology leader. And the one that would have the greatest influence on the world economy basically until now. But in very powerful ways, throughout the second half of the 20th century. In technology, in forging markets, and in geopolitics. What’s important for us in understanding how the ripples of modern economic growth diffuse after World War Two, is to understand that by the end of World War Two, the world was divided in three parts. And those three parts gave rise to a kind of division of the world economy that would persist for some decades, and then finally, themselves, give way to a unified global economy. The first part was the US led part. It was the US, it was Europe, it was vanquished Japan which became and ally of the United States after World War Two. This part is sometimes called the first world. It was the richest part, especially after rebuilding. It was mainly a market economic system. It traded among each other and it was the leading engine of technological change through to the end of the 20th century. The second world, so-called, was the world of Soviet communism. This was the Soviet Union itself which had 15 republics  which, after 1991, became 15 independent  ountries. It was the world conquered by the Soviet Union in central and eastern Europe, Czechoslovakia at the time Hungary Bulgaria, Romania and, other countries of the region where the Red Armies sat and created Soviet style government and economies. It included the People’s Republic of China after 1949, which adopted a communist system. The one that soon enough would be very different from the Soviet style communism.  The third division of the world was the former colonial powers because one of the mega results of World War Two, was that the imperial European countries, themselves in ruins, were certainly in no shape to run empires. And the former colonies had had enough of it. They not only had the ideology, the sense, the awareness that independence was theirs to grab but they saw how destructive their imperial masters had been. The legitimacy of empire was over and the ability of the imperial powers to continue to maintain empire was gone as well, although many of them didn’t notice it because they continued to try to fight rear guard wars to defend imperial possessions. And so the period of decolonization which began around 1947 with the, India, and then with Indonesia, and it followed on throughout Africa, Asia, and other places. That stretched out over a course of decades. But, it created a kind of third world. Third world is a term we sometimes use to mean poor and middle income countries, but it meant something more literal back when the phrase was invented. It meant not the first world of the United States, not the second world of the communist era, but the post-colonial world. Sometimes also a grouping called the non-aligned countries. They said we don’t want US domination, we don’t want Soviet domination, we want to be on our own. And a little bit less formally, a fourth world was sometimes also brought into the mix. That’s the group of countries, basically, that we call the least developed countries today, the countries in absolute abject poverty. Well these were quite the sharp divisions and the world economy evolved under these geopolitical divides for several decades. The first world recovered from the damage of World War Two remarkably quickly by the 1950s. And endogenous technology driven economic growth took hold and the process of modern economic growth and rising living standards took hold in the first world very, very powerfully. In the second world, the communist world, there was industrialization and it seemed pretty dynamic for awhile, but already by the 1960s it was coming into crisis. And by the 1970s, economic development under a non-market communist system was basically screeching to a halt. Countries began to reform. China was the first great reformer in the communist group in 1978 when Deng Xiaoping came to power and said we need to market economy. We need to open China to trade. And that unleashed China’s own catching up growth with remarkable success to the point where China became by far the fastest growing major economy in the world in, in history. Now other parts of the communist world took longer to break free, because the Soviet Union wasn’t having it for a very long time. And it was only when Mikhail Gorbachev came to power in the middle of the 1980s and began his own market reforms and then came the revolutions of Eastern Europe in 1989. And then the end of the Soviet Union itself at the end of 1991 did the second world, basically stop being its own self-contained economic unit, and become part of the world economy. The third world, and the fourth world, included dozens, and dozens of countries, and each had their own economic history, and their own strategies. A very few of the countries early on said, we like that first world model. We’re pretty much interested in integrating with the first world economies. And they figured out something that most of the rest of the developing countries did not figure out until later, and that was that diffusion, the arriving of those ripples, could lift them into a very special kind of industrialization. Mainly where new industries in their own countries, many foreign owned, would become part of global production systems so that a company in Korea or in Taiwan would begin to produce the electronics goods, or the shirts and, and, pants on the racks of, of retailers in the United States and Europe. According to the technology designs and the in, intellectual property of the so-called first world companies. The early developers of that new strategy for catching up were called the Asian Tigers, Korea, Taiwan China, Hong Kong, Singapore. The four of them already by the 1960s and then by the 1970s were growing extremely rapidly by integrating their new young industrial base with the high tech industries of the first world. And as that happened other developing countries watched and said, wait a minute, that’s pretty interesting. Maybe we shouldn’t stay quite so non-aligned, politically yes, but economically maybe we should open our own doors to trade and to foreign investment and try to attract those new multinational companies that could use our country, and our labor force, and our natural resources as a base for their global production systems. This is how globalization came into being. Globalization came into being as this diffusion process created a new kind of catching up after World War Two. Especially starting in countries that opened their trade and opened their borders to foreign investment, so that new global industry centered around multinational companies, could use those countries as basis for global production systems. And that process backed by big breakthroughs in technology, better transport, intermodal transport, so called, from ships to the to the backs of trucks in a very smooth process, containerization of trade through the standard 20 foot containers. And of course the advent of modern computer-assisted design and manufacturing. And the enormous breakthroughs made possible by the internet and by mobile telephony revolutionized the ability of companies to engage in global production systems. And thereby create globally integrated companies, often with hundreds of thousands of employees, operating in more than one hundred countries. And the world’s multinational companies thereby became the main agents for the continuing transmission of those ripples around the world and the continuing diffusion of modern economic growth. Japan was a leader in its own region in this. And they developed a,a wonderful, visual metaphor for this called the flying geese model. Have a look at these geese in formation. You have a goose flying in front and then yeah, in back are others following the lead. And this is how economic development in Asia started as well with the industrialization first of Japan, and then flying in formation just behind came Korea and Taiwan, Hong Kong and Singapore. Behind them, Indonesia, Malaysia, Thailand. Behind them, China, Vietnam. Behind them, Cambodia, Laos. But, as the leading country moves from textiles to electronics, then from electronics to automobiles, then from automobiles to advanced information technology, the country just behind it moves from agriculture, to apparel and textiles, from apparel and textiles to electronics, from electronics onto its own technology innovation of information technology, and one goose after another, to use Japan’s metaphor follows along the way. This map that you’re looking at now shows where the textile firms located. And every red dot is essentially a node of multinational production, where often low wage labor is hired to produce in a global production network of textiles and apparel. You’ll see virtually that every dot in Asia is on the coast just like Adam Smith said in 1776 before he could know anything about such global production chains. You’re looking at a map here of China attracting foreign direct investment. Again China’s great breakthrough after 1978 when Deng Xiaoping opened China to the world was to attract foreign investment that made China an export base for world manufacturing production. And, you can see, also, that the wave goes from darker provinces where its foreign direct investment is the highest, into the interior. Moving from coast to the interior just as Adam Smith had told us. And, the result is by the end of the 20th century and into the early years of the 21st century, what had started as the preserve of England, and then had spread across the English Channel and the North Sea into Western Europe, that had spread to the lands of new settlement first, that had then spread to other temperate zones, then it spread to Central and Eastern Europe, that had been taken up by Japan in late 19th century industrialization, that in the 20th century after World War Two could now spread to the former colonized parts of the world and as they gained their independence was a process of global economic development that had reached almost all the world. There are still places where this is not true til today. Often the most land-locked interior places with difficult climate, with lack of natural resources, and so forth that have all of the burdens and few of the benefits should take hold. But for most of the world, the breakthrough by now has taken place. Of course, those who made the breakthrough early on are today’s rich world. They’re the high income countries. Those who have come late to this by virtue of their history, their politics, their resource base, their geography are today’s middle income or low income countries. Those still waiting to take off are today’s least developed countries. We’re going to turn our attention carefully and in detail to how those least developed countries can make the breakthrough now in the 21st century.

A Short History of Economic Development IV

The Diffusion of Economic Growth

We’ve seen how modern economic growth burst forward in England in the middle of the 18th century. We’ve seen how subsequent waves of technological change, starting first with the steam engine and reaching us today with the information and communications technology revolution, have kept that process of endogenous economic growth continuing now for well over two centuries. But we’ve also noted that economic growth has another crucial dimension. For most of the world not at the technological forefront, and not really contributing in a major way to technological advances, economic growth is heavily about catching up. It is about how a country that sees others in the lead can say I want to use that technology too. We need information technology in our society. We need to use the mask of modern transport technology and the like. This is a process of catching up growth. It might be called, a, a process of diffusion, if looked at from the outside. Because diffusion means that something spreads from one place to the next. I like to think of it as starting with a still pond or a quiet lake. You throw the the rock into the middle of the lake, and then you watch the ripples rippling away from that center. And if the center is where the endogenous, technological leadership growth is taking place. Those ripples signify the spread of those technologies and the modern economic growth that goes along with them to more and more of the world. How does that ripple effect work? What makes the ripples move forward? Why is it that some places in the world seem to be very well poised to follow a, a technology leader pretty close at hand? Whereas other parts of the world seemingly have not been able to take advantage of technologies that are already more than a century old. It’s striking to me, very troubling. Perhaps, one billion people, some estimates have it at even twice that level, do not have access to electricity in the 21st century where this is a technology developed by Edison and Westinghouse already at the end of the 19th century. What stopped the ripples from reaching those places that still today don’t have electricity bringing them the benefits of modern technology and modern life? That really is our question and it is one that great economists have been thinking about for a long time. Adam Smith, way back in The Wealth of Nations in that magnificent work about the modern economy, talked about the fact that diffusion, the spread of technology, would take time. And that it would start at the coast typically and move to the interior. Why at the coast? Because conditions for trade, for market activity, are easier. Why a long time to move to the interior? Because it’s very difficult to engage in trade in the interior of a country or in the interior of a continent in a landlocked country. Let me quote from book one of The Wealth of Nations, 1776, because it’s insights continue to inform and inspire us til today. So Adam Smith says, since such therefore are the advantages of water carriage it is natural that the first improvements of art and industry should be made where this conveniency opens the whole world for a market to the produce of every sort of labor and that they should always be much later in extending themselves into the inland parts of the country. So Smith already says in 1776 economic development is going to start at the coast. It’s going to spread into the interior. We know today, more than 200 years later, that landlocked countries of the world, countries like Bolivia in South America Chad in Niger in Africa, Nepal in Asia are necessarily facing disadvantages in trade, transport and technological advance, by virtue of them being far from the ports and facing very, very high costs of trade. Well, we can go beyond that insight to a general set of insights of factors that are conducive to the move of those ripples from the center of the Industrial Revolution out to the rest of the world. I would start again with proximity to markets. The coast is one part because if you have a port you are, in a way, proximate, or close to, in economic terms, other ports around the world. Clearly, if you are close to a rich country, that also means that there’s a big market for you. Mexico has a big market to sell to, in its next door neighbor, the United States. And in 19th century, countries that were closed to Great Britain had an advantage for their own economic development of a booming economy that would provide a market for their own goods. So proximity to markets, that’s one condition. Good agriculture, definitely an important fact because, after all, most of the modern economy grows in cities, in industry, and in services. So you say why do I emphasize agriculture? Because if agriculture is miserable, you may not have cities to speak of because there may be no food surplus. Countries with very weak agriculture are often exactly those places where most of the population is in farming, ekeing out a living, because they can’t produce enough surplus even for themselves and their families, much less to feed big urban areas. As agriculture improves, a diminishing share of the population can feed the rest of the country and therefore support larger cities which can then be hubs for technological advance and catching up. So good agriculture is important for vibrant cities, and therefore, places with good agricultural potential have tended to have those ripples arrive there faster than places in very dry conditions or poor soils, or other impediments to agriculture. Third obvious point is places that have their own energy resources, be it coal, oil and gas, other resources, hydroelectric power and so forth, have an advantage. It’s always possible to export goods and import your primary energy needs But how are you going to export if you don’t have energy to produce those export goods? So there’s often a problem of even getting started in economic development. Regions that have their home-based primary energy resources, whether it’s the fossil fuels of coal, oil, and gas, or whether it is resources like wind energy or geothermal energy or solar energy. This is very important as a base for domestic production. It makes it possible for those ripples not just to hit a hard wall but to actually continue and general economic change. And so the domestic energy base is extremely important. A physical environment conducive to human health, also important. A disease-ridden environment filled with malaria, filled with worm infections, terrible conditions that afflict many places in the Tropics til today can be real barriers real impediments to the diffusion of economic growth. And finally is politics. If the politics are miserable if dictators or simply chaos and violence grip a society this makes it very hard to achieve economic growth even if the ripples are coming one’s way there’s going to be no ability to harness those advantages in a political environment that is devastating. Well, we can now look very practically at how to apply those insights in understanding the actual ripples that have spread over the world economy since the Industrial Revolution. And I have found it interesting and worthwhile to ask the question, when does an economy first pass a certain threshold out of basic poverty? If we use a certain line roughly about $2000 per person, measured in purchasing power adjusted terms. In other words, adjusting for difference of price levels. Ask when is it that countries first escaped from extreme poverty by reaching that threshold or above. We can learn a lot. Which is the first country to do it? Well, it’s Great Britain, United Kingdom, the home of the Industrial Revolution. Then those ripples start to spread and by now, they’ve reached most of the world. If we look just within Western Europe it’s quite fascinating because it really looks like ripples spreading out from the home of the Industrial Revolution itself in England, out through the neighboring countries the Netherlands right across the sea from England, and then spreading into Belgium and France. Spreading next into Germany, spreading a bit farther into Scandinavia and Spain, a bit later into Central Europe, into what was then the Hapsburg Empire and now is the Czech Republic and Slovakia and Hungary, and, other parts of central Europe and then spreading after that into eastern Europe, Romania, Bulgaria, Russia and other countries further to the east. So what we see is within Europe itself in the 19th century that ripple effect very clear. It starts eh, where the stone hits first, where James Watt and his steam engine revolutionized the, the modern world. And then, you have a diffusion of modern economic growth that is well-dated to distance from England itself. The more proximate to England, the faster the diffusion of technologies, the faster is the uptake of modern economic growth, but since Europe itself is relatively compact by the end of the 19th century virtually all of Europe is on a path of industrial economic development. For the world, it’s obviously a much different story. Eh, the ripples have to travel much longer distances, face far more complex conditions and have hit barriers that have dissipated that energy and have frustrated the takeoff of modern economic growth often for decades and in some cases til now. And you have the take off in what some historians call the land of new settlements, the United States, Australia and New Zealand, Canada. They are early industrializers. They are early to cross the thresholds out of extreme poverty. The next group of countries are countries that share a favorable natural environment. Generally they are in the climate zones that we call temperate zones, like England: four seasons, good rains around the year. Argentina, Uruguay, Chile are examples of countries where the escape from poverty is already underway in the 19th century. In Asia, there’s only one case of industrial takeoff by the end of the 19th century and that’s Japan. Take a look at the map. The place of Japan on the map is fairly analogous to the location of Great Britain off the great Eurasian landmass. Of course, Great Britain on the west of the Eurasian landmass. And, Japan on the east of the landmass. Two island economies, two temperate zone climates, two places where the conditions of social life, literacy rates, freedom from invasion by sea enabled them to have takeoff conditions and Japan becomes the takeoff site for Asia with it’s burst forward into industrialization beginning in 1868, the so called Maji restoration. Much of the rest of the world, no such luck until the second half of the 20th century. Because what happened in a lot of the rest of the world, no independence, no soverinity, in fact, conquest. Europe becomes so powerful that European empires conquer large parts of the tropical world. By the end of the 19th century, virtually all of Africa is under European colonial rule. India has succumbed to British conquest. Much of Asia has succumbed to French and British conquest. And those countries do not pass the threshold out of extreme poverties. The ripples don’t reach them. The imperial powers want to maximize their own well-being at home, their own industrialization. They view their colonies, by and large is places for primary resources, for low-skilled labor, not as places for industrial development. And so a lot of the rest of the world does not see modern economic growth until after World War II, and the process of decolonization. This is a crucial historic period that we’re going to look at next.

A Short History of Economic Development III

The Great Waves of Technological Change

The Industrial Revolution had occurred. The new era of modern economic growth was underway. And, markets drove this process. Technological advance drove this process. First in a highly uneven way where just a few parts of the world were party to this new form of industrial economy and eventually to nearly the entire world. This is the period that the great economic historian and great conceptualizer of economic growth Simon Kuznets called the Era of Modern Growth. It is a unique period of human history. Now, we have defined economic growth as the sustained increase of gross domestic product per person. Or if we look at the whole world, we can call it the gross world product, which is the sum of the gross domestic products of all countries, divided by the world population. And in the era of modern economic growth, the period studied by Simon Kuznets, that world output per capita has increased on a sustained basis for more than 200 years now, in a very very uneven way, however. Some places have achieved marked economic growth for nearly two centuries.

Other places, not so much. Some remained poor, almost until the current day and some very particular places in the world, the world’s poorest of course, are places that have not yet achieved that takeoff of modern economic growth. We need to understand that process, and in order to do so we need to make a quite basic distinction of two kinds of economic growth. Each one is characterized by a sustained increase of output per person. But they really have a very different underlying dynamic to them.

One kind of growth, is the growth of the technological leaders in the world. In the early 19th century that was certainly England. This is where the Industrial Revolution occurred. In the middle of the 19th century and towards the end of the 19th century, Germany and the United States became the great technological leaders, even overtaking Great Britain in that role. In the 20th century, the United States was by far the most technologically dynamic part of the entire world. Though a number of other countries, certainly inventors in different parts of the world contributed to the worldwide stock of technological knowledge. But for those leaders there’s a very particular kind of economic growth, driven by technological advance. By new discoveries, innovations, new ways to do things thatthen spread and give an impulse of sustained growth to the economy. That’s what happened after James Watt invented his improved steam engine in 1776. It was taken up in factories, it was taken up in mines, in the locomotives of steam engines, in steamships and in many other technologies. And that gave a wave of economic growth of the technological leaders, those that invented those new breakthroughs. There’s a second kind of economic growth. That’s the economic growth of a country, that for whatever reason of history and geography. Perhaps resource based, perhaps just bad luck or bad policy. Stayed back, as those leaders charged ahead.

And so, a country like China, for example, did not industrialize in the 19th century, where England and the United States and Germany and other countries partook of the Industrial Revolution, and developed industrial economies. At some point, countries like China and we could say any of the emerging economies today. Looked out and saw examples of other countries far in front of them in technological lead, and with far higher income levels and typically as we know therefore much different conditions of life. Urban, generally longer life expectancy, generally healthier lives, generally more education, more public services, more opportunities and so forth. And those laggard countries had to solve a problem: how do we catch up? And that gave rise to a different kind of growth, and that is the kind of economic growth where a country that is lagging in technology and in income per capita, makes a tremendous advance quite rapidly, in narrowing the technological gap with the leader. These two different mechanisms of growth, the first one based on continuing innovation, and the second one based on closing a gap that has opened up by taking on the technologies of those advanced countries that have already been able to use them. Form the two major ways that economic growth proceeds in the world. The failure to understand these differences leads to all sorts of confusion in the discussion of economic development, because the kinds of institutions that countries need to innovate, for example, to have that first kind of growth. Endogenous growth, meaning growth from within the system itself where technological advance gives rise to more technological advance, those institutions are quite different from the catching up institutions. Those kinds of institutions, where the goal is to close the gap as fast as possible with the countries in the lead. For those institutions a stronger role of government, for example, can often be a major spur to a rapid, rapid push of economic growth. To close the gap that is already opened up. You don’t need so much innovation, but you do need widespread investments, development of infrastructure, the ability to bring in technology from abroad to close the gap. And so understanding the two kinds of growth, and therefore the two kinds of institutions that are needed to solve the growth problem is tremendously important. I want to focus first on endogenous growth, the growth of the technological leaders. It’s the kind of growth where one good thing leads to the next. Economists sometimes call this an increasing returns to scale process, and you get an ongoing process out of that that can be very dynamic. Clearly, in the case of modern technology, going back to the onset of the Industrial Revolution, there have been waves of technological breakthroughs. There have been many theorists of those waves: Kondratieff, the Russian technology historian was one of them with great influence in thinking from his writings until now. And one can think about the era of modern economic growth from the middle of the 18th century till now, having a series of waves, some people say three waves of Industrial Revolution. Others date them as four waves. But the notion is that these waves of technological change in the leading countries are the drivers of this process of endogenous economic growth. One classification says that there have been five waves until now. I think it’s a worth while idea for us to look at. The first of these Kondratieff waves in this particular classification, puts the stream engine at the core from 1780 to 1830 roughly from the time of James Watt’s invention to its wide spread application. The second of these waves is the great burst of railway and steel. And even if the technological roots of railways and steel come before 1830 the take off of those industries could be dated roughly to that time. The third of these waves is the age of electricity. Again, the discoveries of electricity date back to Benjamin Franklin, flying the kite and understanding electricity in the atmosphere, static electricity, to Michael Faraday and the discovery of induction and the beginning of the understanding of electromagnetism. In the first half of the 19th century, but then Edison and others applying the new knowledge of electricity to give us electric lighting, incandescent bulbs, city streets with electricity. And then of course, moving electricity into the homes and into the factories towards the end of the 19th century. After the Age of Electricity which is put 1880 to 1930 is a fourth wave led in this classification by automobiles and petrochemicals. Plastics and new polymers and new materials industries and much more. One could add, of course, the age of modern aviation. Again, the underlying technologies for the automobile date to the end of the 19th century, the internal  combustion engine which powers automobiles till today. But the economic, dramatic application began in the early years of the 20th century with the Model T. With Henry Ford’s inventions of modern production processes on the factory line. And with the mass production of automobiles which absolutely transformed the way we live, where we live, how we produce and of course, how we trade in the economy. The fifth wave in this classification dates to around 1970 but again with roots that go back much earlier. This is the knowledge economy, the age of computers, the great advent first of the huge mainframe computers in the 1930s and 1940s, much spurred by World War Two and the immediate aftermath of World War Two. And then the discovery of the transistor at the end of the 1940s and the invention of the integrated circuit which gave rise to the modern computing age, mobile phones and all the rest of industry that has been made possible by Moore’s Law. Moore’s Law you’ll recall is the fact that roughly every 18 to 24 months the number of transistors that can be put onto an integrated circuit has doubled. This means that the ability to process, to store, to transmit data has roughly doubled, or the cost of doing so has roughly fallen by half every 18 to 24 months. Well, you do that over a period of more than 50 years and you arrive at roughly a billion time improvement in the ability to process, store, and transmit information. And we know that is revolutionizing the world in this great fifth wave of the information and communications technology driven era. Will there be a sixth wave of technological change? The one we really need now, a wave of sustainable technologies. Ways to produce energy, ways to mobilize energy, ways to transport ourselves, and transport goods that take the massive pressures and the destructive forces off of our ecosystems. This is the great challenge. We’ve had now 250 years of modern economic growth. We’ve had waves of great technological change and we need to enter a new era. A new wave of technology, of sustainable development technologies in the way we live. The way we protect the planet. And at least we can take confidence from the past. And also grab on to some of the great scientific and technological insights that we have at hand. To give us hope and confidence, and determination to move forward to that next great wave of endogenous growth. This one based on protecting the planet and achieving sustainable development.