Arquivo de etiquetas: Desenvolvimento Económico

A Short History of Economic Development II

The Industrial Revolution Starts in England

Modern economic growth began in England. It’s strange. We know it. We can watch it. This unique phenomenon in human history after millennia where living standards did not change very much. When suddenly population and output per person began to soar. Started in a particular place on the planet. It didn’t start in five places, it didn’t start in eight places. It wasn’t separate discoveries. It started in England. We can watch it. And therefore we can understand how this came about. I sometimes feel it’s a little bit like a biologist being able to watch the start of life. The first bit of life that emerges that gives rise to all the rest. What’s so interesting about life and one of the reasons why I view it as an analogy for an economy is that we know that every kind of life on this planet shares some basic metabolism and DNA structure. And so the biologists have said life appeared once and from there it has evolved and it has created a biosphere, a world of millions and millions of species. It all started, presumably, from a cell. Modern economic growth also has a kind of DNA. It also came together from a number of different materials and viola, something took off. Also, in a way, a living property because a growing economy gave rise to forces that continued the economic growth once it took off. If it were so easy to create economic life, it would’ve happened many places. We would have records of long economic growth in China, long economic growth in different parts of the world. But as John Maynard Keynes rightly pointed out, we did not see that in human history. So what happened in the Industrial Revolution as we call it, in the middle of the 18th century in England, in my view was a unique coming together of various forces, that allowed life in the economic sense to take off. That first cell of a modern economy that became replicating and that eventually spread to the entire world economy took off. Well what is it about the Industrial Revolution? I think let’s take a hint from the word, industry itself. For the first time a society moved beyond agriculture as the base, to one in which industry was the base. This required a fundamental change of know-how, of technology, of technical advance. But just like life itself requires a lot of interaction of the components of the cell, so too the life of an economy requires many things to come together. Technology is certainly a core part but connecting the different parts of the economy, the rural area where people are growing food, the factory towns where workers are working in factories producing textile goods, steel new output, those interconnections are needed as well. The food has to get to the city. The manufactured goods, the shirts and clothing are sold back to the farmers. That requires transport, that requires a market, that requires exchange. And so for the Industrial Revolution to come together in England in the 18th century many things had to be present. First agricultural productivity starts to rise. I wouldn’t call it yet scientific farming, but I would call it very systematic and evidence-based farming. Farmers learning, better rotations for crops, how to replenish the soil nutrients. There was more urbanization, more trade, a market economy taking hold, property rights, rule of law beginning to take hold. Of course, there was the wonder of the scientific revolution. Isaac Newton had shown that our world in physical terms is governed by natural laws. This opened up a completely new way of understanding things and it opened up new avenues of practical exploration as well. One of the great breakthroughs came from 1712, even before the Industrial Revolution but maybe you can say it was the start of it. The invention of a steam engine by Thomas Newcomen. The first steam engine, burning coal to create motive force, was used to pump water out of the shafts of mines. It was the beginning of the revolution of steam engines and of, of technology. And then came a, wonderfully creative targeted genius who working in a university lab in Glasgow in, in Scotland realized that Newcomen had made a couple of design mistakes even though it was a great breakthrough. James Watt looking for profit as well as for glory, said, I can improve on that steam engine and the Watt steam engine in 1776 came to life. I think it’s fair to say this was the breakthrough from a technological point of view of the industrial era. And in a way, it was the technological trigger of all that followed. Because now it was possible to harness massive amounts of energy efficiently, economically, effectively, to make profits. These are the components that come together in England uniquely. But of course, we have to understand always that without nature playing its helpful role, it would have been impossible for all of the genius of Newcomen and, and Watt if there were no coal in England. And there never would have been a steam engine or Industrial Revolution. Coal, iron ore deposits that could be turned into a modern iron and steel industry. Wonderful transport conditions on rivers on flat land the proximity of the coal fields to London. The ability to build canals to connect the coal fields with the, the new factory towns and allow for low-cost barge traffic. All of this is an example of the very special conditions in which nature and nurture, you could say, the human ingenuity, the spur of profits, the patent law, the rule of law, the market economy came together to make possible this industrial revolution. Have a look at the first individual who gave a modern description of this even though he did not mention industry itself all that much especially not the steam engine because it was occurring exactly the same year he published his wonderful work. You’re looking at Adam Smith, the author of The Wealth of Nations. I think rightly called the father of modern economics. Think James Watt produces the modern steam engine in 1776. Adam Smith publishes The Wealth of Nations in 1776. The American colonies declare their independence and the inalienable right to life, liberty, and the pursuit of happiness in 1776. Quite a year for a takeoff. Putting together the concepts of a modern economy governed by market institutions, technological advance, the availability of crucial natural resources, making possible the birth of a new kind of economic life. Adam Smith explained the workings of a modern economy. He gave us the idea of the invisible hand of market forces helping to spur inventors, manufacturers, farmers so that working together, not through literal cooperation but by trading in the market place, could bring about a modern market economy. And one of Adam Smith’s wonderful lines from The Wealth of Nations explains, and I quote, it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity, but to their self-love. And never talk to them of our necessities but of their advantages. In other words we buy from the baker, the brewer, the butcher. It is through market transactions that have them producing their products, buying from the farmers. It is from the manufacturers selling their goods,earning and looking for profits that make the modern world economy work. And we know the images of that early modern era. James Watts, steam engine. The new factory towns with the coal burning and, and the smoke coming out of the high chimneys. The new modern form of transport in the early 19th century, the steam engine pulling railroads and transforming transportation around the world. The steam ship and the new factories that are now powered by not human or animal traction as was before people pulling and pushing machines or animals pulling plows, but now steam providing a massive, unprecedented amount of energy. To drive the new industry to make possible an unprecedented rise of a modern world economy combining the natural resource base, the technological knowhow and a spreading market economy. Now one of the stunned observers of this, one of the critics of of some of the harshness of early industrialization of course was none other than Karl Marx. And Marx and his co-author Friedrich Engels wrote in the Communist Manifesto in 1848 a kind of ironic tribute to the power of this new, modern economy driven by these breakthroughs in technology, changing the world in a unique way. They caught that mood, even if they didn’t like it or fully understand of course what would evolve. And even if they rightly pointed out some of the harsh downsides, especially in that era, it’s worth listening to Marx and Engels, how they describe this new world in 1848. And I quote. Modern industry has established the world market, for which the discovery of America paved the way. This market has given an immense development to commerce, to navigation, to communication by land. This development has in its turn reacted on the extension of industry and in proportion as industry, commerce, navigation, railways extended in the same proportion, the bourgeoisie, the new capitalist class developed, increased its capital and pushed into the background every class handed down from the Middle Ages. A new world indeed had arrived. The Industrial Revolution had brought form, forth a new kind of economic life indeed. A unique form that created the modern era of economic growth.

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.