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Graduate Course in Economic Development & HistoryLecture 3

Economic History:Economic Development in Historical Perspectives

December 8, 2009

Chiaki Moriguchichiaki@ier.hit-u.ac.jp

Institute of Economic ResearchHitotsubashi University

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Today’s Theme:Economic Development in Historical Perspectives

1. Industrial Revolution & Economic Development- Historical Statistics by Maddison (2003),- Inspired numerous macro growth studies,

2. Determinants of Long-run Economic Development- History from 10,000 B.C. to 1500 A.D.: (Diamond 1997)- Rise and Fall of China & European Miracle: (Kennedy 1987)- Geography vs. Institutions (Acemoglu, Johnson & Robinson

2001; 2005)- Political Economy of Institutional Change.

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Long-run Historical GDP Estimates:

Angus Maddison (2003). The World Economy: Historical Statistics

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World GDP per Capita from 1 to 2000 A.D.

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Why Is Not the Whole World Developed?

• In 1000-1800, the World GDP grew at 0.2% annually; in 1800-2000 it grew at 1.2% annually.

• In 1000-1800, the GDP in Western Europe grew at 0.3%annually; in 1800-2000 it grew at 2.4% annually.

• In 1000-1800, the World GDP per Capita grew at 0.05%annually; in 1800-2000, it grew at 1.0% annually.

• In 1000-1800, the GDP per Capita in WE grew at 0.1%annually; in 1800-2000, it grew at 1.6% annually.

• In 1500, Inter-regional Income Inequality was small (1:2).But by 2000, inter-regional income inequality grew large (1:18).

• What happened around 1800? Industrial Revolution

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Industrial Revolution & the Birth of Industrial Capitalism♦ First Industrial Revolution

– Britain, 1750-– Textiles, iron, coal mining, light machineries.– Water frame (1770), spinning mule (1780), steam engines (1770),

coke-fueled blast furnace (1800).– Water mills, turnpikes & canals (1750), factory system (1770).

♦ Second Industrial Revolution– Germany & the U.S., 1850-– Heavy industries (steel, chemical, automobiles)– Railroads (1840), telegraph (1840), Bessemer converter (1870),

steamship (1880), radio (1900).– Electric motors (1880), internal combustion engines (1890), mass

production (1910).♦ Third Industrial Revolution

– U.S. & Japan, 1950-– Consumer electronics, computers, pharmaceutical.– Refrigerators & air conditioners (1920), antibiotics (1930), jet engines

(1940), semiconductors (1950), PC (1975), internet (1980).

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Why Eurasia?Jared Diamond (1997), Guns, Germs, and Steel

♦ Why Did Europe Colonized the New World? Spanish Conquistador Pizzaro vs. Inca Emperor Atahuallpa in 1532:

– 168 Spanish soldiers vs. 80,000 Inca soldiers,– Atahuallpa captured, paid tons of gold, but executed.– Spanish: steel swords, steel armor, 12 guns, 62 horse men,– Inca: wooden clubs, bronze axes, slingshots, quilted armor,– Pizzaro informed about Cortez’s conquest of Aztec in 1520, but

Atahuallpa ignorant about Spanish attacks elsewhere. But Even Before the Military Confrontations:

– Smallpox and measles decimated native populations.

♦ European Advantages over the New World:– Immunity to infectious epidemics,– Steel weapons, cavalry, guns (muskets by 1600).– Centralized states and literacy.

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Eurasian Advantages in Plant & Animal Domestication

♦ Origins of Major Crops and Domesticated Large Mammals:– Fertile Crescent (include North Africa)

• Wheat, barley, pea, lentil, chickpea, olive, flax,• Sheep, goat, donkey, camel.

– Asia• Rice, millet, soybean, mung bean, hemp, cotton,• Horse, cow, pig, (dog, silkworm).

– America• Potato, quinoa, corn, lima bean, peanut, squashes,• Llama, (guinea pig, dog, turkey).

– Sub-Saharan Africa• Yams, rice, sorghum, millet, bottle gourd, coffee,• No animals.

♦ Impossible to Domesticate:– Elk, moose, zebra, elephants, bison, vicuna, kangaroo.

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Agricultural Settlements & Germs

♦ In 10,000 B.C., All Human Were Hunter-Gatherers.♦ Better Natural Endowments Early Food Production:

– Fertile Crescent in 8500 B.C.– China in 7500 B.C.

♦ Never Developed Food Production before 1500:– Northwest America, South Africa, New Guinea & Australia

♦ Diffusion of Food Production Technology:– Much Faster on the East-West Axis (i.e. within Eurasia),– Very Slow on the North-South Axis (i.e. Africa, America, Australia).

♦ Agricultural Settlements 10-100 times Higher Population Density– New epidemics through animal-human transmission in Eurasia,

• Smallpox, measles, flu, typhus, tuberculosis– Immunity developed among surviving Europeans,– Between 1492 and 1600, 95% of the Indian population in America

wiped out by Europe-originated epidemics.

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Why Europe? Why Not China or Islam?

♦ Diamond’s Thesis: Geographical Determinism– It was not culture or racial differences, but the difference in

natural endowments 10,000 years ago (climate, plant andanimal species) that gave huge advantages to Eurasia,

– An ultimate story of path-dependence.

♦ Within Eurasia, Why was Europe Industrialized First?– Max Weber (1905) Protestantism Ethic and the Spirit of

Capitalism: Protestantism’s unique approval of the pursuit ofeconomic gains (cf: Catholicism, Confucianism, Islam).

– John Needham (1957) Science and Civilization in China:Bureaucratic feudalism incompatible with capitalism as theyresent any changes.

♦ Paul Kennedy (1987): Rise and Fall of the Great Powers.

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China’s Technological Leadership, 1000-1400♦ Inventions of Chinese Origin:

– Blast furnace by 500 B.C.– Paper making by 100 A.D. Islam in 753 Europe in 1453,– Printing by movable type in 1045 (made of porcelain) Europe

in 1453 (cast-iron type & interchangeable parts),– Magnetic compass in 960,– Gunpowder by 1000,– Elaborate astronomical clock in 1086,– Large ocean-going ships with multiple masts by 1200,– Multi-volume agricultural handbooks in 1313,– Oversea explorations in 1405-33,– Water-driven hemp spinning machines circa 1400,

♦ Ming Dynasty, 1368-1644:– Unified empire with efficient bureaucracy & strong military,– Highly urbanized and commercialized.

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Cheng Ho’s Great Maritime Explorations, 1405-1433

♦ Ming Emperor sponsored extensive naval expeditions:– 7 voyages, each lasting 2-3 years,– 50 junks (120 meters long, 9 masts, 500 passengers) and 150

smaller vessels, carrying 30,000 soldiers,– Visited over 20 states in today’s Indonesia, Thailand, India, Arabia,

and East Africa, reaching the Indian and the Red Seas– Presented gold, silver, porcelain, silk,– Received ostriches, zebras, camels, giraffes, and more.

♦ Next Emperor reversed the policies:– Imperial ban on ocean-going ship constructions in 1436,– Imperial ban on maritime explorations in 1480,– Restrictions on printing press,– By 1550, ship building technologies forgotten,– By 1600, record of mechanical clocks lost,– By 1750, iron mills abandoned.

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Ship from the 13th Century Song Dynasty

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Map from Ming Dynasty in 1402

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What Explains the Eventual Decline of China and Islam?

♦ Q. According to Kennedy (1987), which of the following factorsdoes NOT explain either the decline of the Ming Dynasty or thedecline of the Ottoman Empire? (5 points)

1) Bureaucratic conservatism that repressed technologicalinnovations.

2) Military ambition that led to overextension of the empire.3) Religious intolerance that discouraged freedom of

thoughts.4) Political fragmentation that led to constant warfare.5) Local officers who engaged in internal plunder.

♦ What sets Europe apart from China and the Islam?– The lack of bureaucratic/ religious conservatism?– The absence of oppressive or abusive rulers?– Political fragmentation & military pluralism!

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The Impact of Colonization Revisited

♦ According to Diamond, the places colonized by European powers after1500 should be equally worse off. But there is large variation within ex-colonies with respect to their economic performance in 2000:– Very high GDP per capita: North America, Australia, HK,– Low GDP per capita: Central & South Americas, India,– Extremely low GDP per capita: West Africa

♦ How do we explain these differences?– Does the colonizer matter? (Britain a “better” ruler than Spain?)– Must account for endogenous selection by colonizers.– Institutional transfers conditional on colony characteristics.

♦ Institutional Determinism:– Recent studies by Daron Acemoglu, Simon Johnson, and James

Robinson.

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Colonial Origins of Economic Development

♦ Acemoglu, Johnson & Robinson (AER 2001) “Colonial Origins ofComparative Development: An Empirical Investigation”; AJR (QJE2002) “Reversal of Fortunes: Geography and Institutions in MakingModern Income Distribution.”

♦ What are the fundamental causes of large differences in income percapita across countries?– Difference in “institutions” such as secure property rights and non-

corrupting governments that encourage investments,entrepreunership, and well-functioning markets.

– In fact, in cross-country data, there are positive correlationsbetween GDP per capita and institutions.

– But it is difficult to estimate the effect of institutions on economicperformance due to reverse causality (rich countries can affordbetter institutions).

– We need a source of exogenous variation in institutions.

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Colonial Origins of Economic Development (cont.)

♦ “Colonization Strategies” as a Source of Exogenous Variations:– Exploitation strategy: extract and transfer resources from colony to

colonizer extractive institutions– Example: Congo (Belgium), Nigeria (Britain), Peru (Spain); forced

labor, high tax, monopolies, weak property rights, abusive state.– Settlement strategy: create a “Neo-Europe” in a colony to migrate

(or send convicts) and settle more democratic institutions– Example: Australia, Canada, the U.S.,– Colonization strategy was determined by the feasibility of

settlements by Europeans (= malaria & yellow fever):• Britain gave up settling in Sierra Leone because 72% of British

settlers dies in the first year.– We can use the mortality of early settlers as an instrument for

colonial institutions,– Colonial institutions typically persisted even after independence, and

thus are highly correlated with today’s institutions.

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Data: 64 Countries Previously Colonized

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Estimation Strategy

(1) Y1995 = a + b INST1995 + c X + error,

(2) INST1995 = f + g INST1900 + h X + error,

(3) INST1900 = l + m SETTLE1900 + n X + error,

(4) SETTLE1900 = p + q MORT1800 + r X + error.

Y: GDP per capita in 1995.

INST: (a) constraint on executive power, (b) democracy, (c)protection against expropriation, measured in 1900 and 1995.

SETTLE: Fraction of the population of European descent in 1900.

MORT: Mortality rate of European settlers in 1800.

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Correlations between INST in 1990 & MORT in 1800

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IV Regression Results

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Robustness Check (1): Colonial Origins, Laws, Religions

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Robustness Check (2): Geography & Disease Environments

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Geography vs. Institutions

♦ Geographical Determinism (Diamond, Toinbee, Sachs):– The differences in economic prosperity can be explained by

geographic, climatic, or ecological differences across countries.– Tropics (low soil quality unsuitable for agriculture + diseases such

as malaria) particularly harmful to economic growth.– Natural resources (navigable river, natural harbors, coal deposits)

also important.♦ Institutional Determinism (North, AJR):

– The key to economic prosperity is a cluster of institutions thatensures secure property rights and provide incentives to invest.

– After taking into account the impact of geography on institutions,geography per se has no impact on economic performance.

– Disease and health environment endogenous to economic growthand provides spurious correlations.

– Institutional persistence the key to solving the problem of economicdevelopment. Why do bad institutions persist so long?

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Political Economy of Institutional Persistence

♦ AJR “Reversal of Fortunes”; Engerman & Sokoloff “Facor Endowments,Institutions, and Paths to Economic Growth in the New World.”

-> Attempt to endogenize colonizer’s choice of institutions as beyond settlermortality,

♦ Places rich in mineral deposits (gold, silver, copper) or suitable for plantationagriculture (sugar, tea, coffee, cotton) Use native population (or import slaves) as forced labor Europeans monopolize political power, trade, and economic profits To protect status quo, block liberalization & democratization Persistence of Extractive institutions Political changes only through revolutions and coup d’etat Major hindrance to industrialization after 1800.

♦ Places sparsely populated in temperate climate (North America, Australia) Large inflow of European immigrants Establishment of private property rights, laws, equal access to power, Further democratization, investment in public goods and education, Conducive to technological progress & industrialization.

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Topics Not Discussed

♦ The Impact of Slavery on Long-run Economic Development.

♦ Why Did Britain Industrialized First? Why not Spain or France?

♦ Why was Japan able to Industrialized First among Non-westerncountries?