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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.