L11118 - Growth and Development in Long-Run Historical

Perspective
Dr Roberto Bonfatti
Academic Year 2015-2016

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1 Introduction
The figure below provides a good starting point to understand the motivations for this module.
It reports per capita GDP in 2000, for a number of regions as well as for the World as a whole.
Per capita GDP is a commonly-used measure of the wealth of a country: it measures the value
of everything that is produced in a country in a given year, divided by its population. So if
country A has a higher per capita GDP than country B, this means that the average citizen of
country A is richer than the average citizen of country B. Or equivalently, country A is richer
than country B.

Figure 1: Source: Maddison (2006)

One striking fact that emerges from the figure is that, in 2000, the USA and Western Europe
were much richer than most other place in the World, and they were also much richer than the
World as a whole. For example, they were respectively 8 and 6 times richer than China. One
key goal of this module will be to understand why is it that places like the USA and Western
Europe are much richer than most other places in the World.
To answer this question, we will be looking at the historical determinants of the current
distribution of wealth, as described in the figure above. On reflection, this approach only makes
sense if we believe that there was something in the history of, say, the USA and Western Europe,

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that made them to become richer than most other places, as opposed to them being bound by
nature to be richer. Is this a reasonable belief? The next figure answers to this question.

Figure 2: Source: Maddison (2006)

The figure says two main things. First, everyone’s per capita GDP was much lower in 1000
than in 2000. Second, there were much smaller differences in per capita GDP across countries,
and China and India were actually richer than the USA and Western Europe! Thus, the USA
and Western Europe are not bound by nature to be richer than most other places. Instead,
something must have happened between 1000 and 2000 hat made become so, and we want to
understand what that was. To get and idea of when exactly did the USA and Western Europe
become much richer than most other places, we just need to take a look at the following three
figures.
The first figure looks at the evolution of per capita GDP in 1000-1820. Over this period,
Western Europe and the USA grew faster than the rest of the world (the USA grew faster from
1500 onwards), and by 1820 they were about 2 times as rich as China. So something important
must have happened in Western Europe and the USA over this period, if these regions went from
being poorer than China in 1000 to being twice as rich in 1820. Notice however that the USA
being two times as rich as China is still a far cry from the situation in 2000, when the USA was
eight times as rich as China. Moreover, some historians (see for example Pomeranz, 2000) argue

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 Figure 3: Source: Maddison (2006)

that the numbers reported in the figure are wrong, and China was actually as rich as Western
Europe and the USA in 1820. If they are right, evolutions occurred in the period 1000-1820 can
explain even less of the distribution of income in 2000!
The next figure looks at the evolution of per capita GDP over the period 1820-1900. Over
these 80 years, the USA and Western Europe grew very fast, while the rest of the world continued
to grow very slowly (in fact, the Chinese economy even shrunk in this period). As a result, by
1900, the USA and Western Europe were around 8 times and 6 times richer than China. But
that is exactly what we observed in 2000! This dramatic change in the world distribution of
wealth - with Western Europe and the USA becoming much richer than everyone else over a
relatively short period of time - is a phenomenon known as the Great Divergence. But what
factors made the Great Divergence possible? The answer to that question has two parts. First,
Sustained Economic Growth emerged in this period - the fact that per capita GDP began to
grow very fast in some countries. And second, Sustained Economic Growth emerged in Western
Europe and the USA but not in the rest of the world. One key goal of this module will be to
understand what are the drivers of sustained economic growth, and why did it emerge in Western
Europe and the USA earlier than anywhere else.
The above discussion suggests that the 19th century definitely a period that we need to focus

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Figure 4: Source: Maddison (2006)

Figure 5: Source: Maddison (2006)

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on. The next figure looks at the period 1900-2000. In the 20th century, sustained economy
growth continued in the USA and Western Europe, but it extended to the rest of the world as
well. As a consequence, the distribution of wealth in 2000 was similar to that in 1900 (although
almost everyone was much richer). You may think that this is good news - at least, the 20th
century did not witness a further increase in inequality. But there is a big puzzle here: namely,
why didn’t all countries in the world catch up to Western Europe and the USA? Why did many
of them1 remain in the same relative position they had in 1900? We are very interested in
understanding the reasons for this lack of catching up, and so the 20th century is also a period
that we need to focus on.
Now, there is another big fact implicit in the last three figures, something that, on reflection,
is even more striking that the Great Divergence. This is illustrated in the next two figures. The
first figure represents per capita GDP for the whole world between the year 0 and 2000. The
second figure gives the average growth rate of world per capita GDP in four subsets of the same
period: 1-1000, 1000-1500, 1500-1820 and 1820-2000. The striking fact that emerges from both
figures is that sustained economic growth is a “novelty” in the history of the past 2000 years.
Furthermore, the fact that the per capita GDP in the year 0 is estimated to have been only 400
US$ (at 1990 prices) - which is commonly considered the minimum income needed for survival -
suggests that sustained economic growth is an absolute novelty in the whole of human history. To
understand why, at some point in our history, we human beings have begun to grow, is another
key goal of this module.
Finally, a final fact that we will be interested in explaining has to do with the current
performance of a group of countries that were, until recently, very much behind Western Europe,
but are now rapidly catching up. Consider for example the case of China. We saw that, in
2000, the USA and WE were, respectively, 8 times and 6 times richer than China. But has that
remained constant in recent years, or has it changed? An answer to this question is contained
in the next figure.
Clearly, China has been rapidly catching up to the USA in 1990-2008. The USA was actually
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In fact, some of them - such as Japan and Hong Kong - did catch up to Western Europe and the USA. We
will study the reasons for their exceptional success later in the module.

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Figure 6: Source: Maddison (2006)

Figure 7: Source: Maddison (2006)

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 Figure 8: Source: Maddison (2006)

12 times richer than China in 1990, but, by 2008, that advantage had shrunk to “only” 5 times.
In other words, China seems to have made up for almost half of its lag vis-a-vis the USA in
only 8 years, between 2000 and 2008. A similar, although less impressive, pattern is also evident
for countries such as Brazil, Russia, India and South Africa, that is the other members of the
so-called “BRICS” group of countries. Thus, the BRICS seem to have learnt how to grow, and
they are rapidly catching up to the richest countries in the world. A final goal of this module
will be to try and evaluate this grow, to understand whether it can be expected to continue.
In summary, there are three major facts that form the motivation for this module:

• Fact 1:

– For most of human history and until the 18th century, economic growth in the world
was almost zero;

– Only the last two centuries have witnessed the emergence of sustained
economic growth;

• Fact 2:

– Sustained economic growth has emerged in some countries much earlier than in others;

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 – In particular, places like Western Europe and the USA have been growing much faster
than most other countries;

– Sustained economic growth is the reason why places like Western Europe
and the USA are much richer today than most other countries. Had it not
been for sustained economic growth, these countries would now be not much richer
than China and India, or might even be poorer.

• Fact 3: countries like the BRICS are now rapidly catching up.

Given these facts, our goal in this module will be to answer the following three key questions:

• Question 1: why has sustained economic growth only emerged over the past two centuries
or so?

• Question 2: why has sustained economic growth emerged in some countries much more
than in others?

• Question 3: what does this imply for countries that are currently catching up, such as
Brazil, China and India?

The module will be structured as follows. We will proceed in three steps, or parts.

Part I (Lectures 2-10): proximate causes

We will introduce a series of theories about the processes that underpin sustained economic
growth, and use them to better understand the historical experience. This part will teach us
“how can growth happen”. In other words, we will learn how is it possible that a country becomes
richer over time, and what are the engines of this. We will begin in Lecture 2 by considering
the case of traditional economy, that is the kind of economy that all countries had from the
the beginning of human history (130,000 BC) until the 18th century. Such an economy can be
described with a simple graphical model:

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 labor force (L)

technology
GDP
(A)

land (X)

In a traditional economy, the labor force (L) is combined with land (X) to produce GDP. We
can think of this as farmers working the land, but also, going further back in time, as hunter-
gatherers roaming a forest to hunt animals and collect edible plants. We believe that, in general,
both an increase in the size of the labor force (L ↑) and an increase in the amount of available
land (X ↑) will allow an economy to produce more GDP. However, how much GDP can be
produced for given labor force and for a given amount of land will also depend on the level of
technology. For example, a farmer working the land will produce more if it uses a tractor than
if it uses a pair of oxen; and a hunter roaming a forest will be more successful if it uses a gun
than if it uses bow and arrows. In fact, we believe that an increase in the quality of technology
(A ↑) will, in general, lead to an increase in GDP.
So L ↑, X ↑ and A ↑ will all lead to an increase in GDP. But how can sustained economic
growth (by this, we always mean a continuous growth in per capita GDP) take place in this
economy? Arguably, a country cannot increase the amount of available land forever, since it will
sooner or later hit its geographical borders. And while an increase in L will increase total GDP,
we will see that it actually typically decreases per capita GDP, since total GDP has to be divided
among a larger number of workers. Thus, the only possible source of sustained economic growth
in a traditional economy is A ↑, which we will equivalently call technological progress. We
will, however, prove a striking a result: even continuous technological progress does not lead to
sustained economic growth in a traditional economy, because its effects tend to be absorbed by
an increase in population. This result, which is known as the Malthusian trap, will help us
make sense of the fact that much pre-18th century technological progress (such as the invention
of agriculture, of the wheel, or crop rotation, or fertilisers, of the plough, etc) did not lead to
sustained economic growth. Thus, the Malthusian trap will help us explain the fact that there
was no sustained economic growth in the world economy until economies remained traditional,

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that is until the 18th century.
Our next step be to consider the case of a modern economy, that is the kind of economy that
emerged in some parts of the world in the 19th century, and is now common to most developed
countries. Such an economy can be represented with the following graphical model:

labor force (L)

physical capital (K) technology

human capital (H)

In a modern economy, the labor force (L) is combined with physical capital (K) and human
capital (H) to produce GDP. We can think of physical capital as of the machines that workers use
in an industrial plant, but also as of all those physical infrastructures (roads, bridges, buildings,
etc) that are needed for an economy to work. We can think of human capital as the knowledge
and skills that are embedded in workers. In general, L ↑, K ↑ and H ↑ will all allow an economy
to produce more GDP. But how much GDP can be produced for given labor force, physical and
human capital will also depend on the level of technology. For example, a train driver working
on the London-Nottingham line will transport more passengers per day if using a high-speed
train, than if using a traditional train.
Unlike in a traditional economy, A ↑ is not the only possible source of sustained economic
growth in a modern economy. That is because, unlike land, physical and human capital and
human capital can be accumulated indefinitely. In fact, we will show that K ↑, H ↑ and A ↑ are
all sources of economic growth in a modern economy. Thus, the accumulation of physical and
human capital and technological progress are the reason why the world economy have been able
to grow since the 18th century.
Our final step will be to go back history and show that, indeed, a transition from a traditional
to a modern economy, and the accumulation of physical and human capital and the improvement
of technology, were the causes of the emergence of sustained economic growth in Western Europe
and the USA. In particular, the industrial revolution (1750-1850) marked the transition from a

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traditional economy to a modern economy for some of these countries, with the others following
suit.

Part II (Lectures 11-19): fundamental causes.

Having ascertained that the accumulation of physical and human capital and technological
progress were the forces that made sustained economic growth possible from the 19th century
onwards, we will turn to an obvious puzzle. Why didn’t these forces emerge everywhere? In
other words, why did sustained economic growth not emerge in all countries at the same time?
To answer this question, we will need to dig into a contemporary debate about the necessary
pre-conditions that must be in place for people to be able to accumulate physical and human
capital, and to invent and adopt new technologies. Such necessary pre-conditions are also known
as the fundamental causes of growth.
Four types of fundamental causes of growth have been proposed. Luck, culture, geography,
and institutions. Supporters of the luck hypothesis maintain that a great deal of a country’s
performance can be explained with whether or not, in his history, the country had luck. A
classical example is the quality of a country’s political leaders. If a country is unlucky enough
to be led by a series of bad political leaders - bad because they don’t know how to govern, or
because they are not interested in governing well - then it may be exceedingly hard for citizens
to accumulate physical and human capital and to invent and adopt new technologies. That’s
because a number of government services (such as an efficient financial market and an accessible
and efficient education system) must be in place for people to be able to accumulate physical
and human capital and to invent and adopt new technologies, but at least some of these services
won’t be in place if leaders are ineffective.
Supporters of the culture hypothesis point out that not all cultures are equal at encouraging
people to accumulate physical and human capital, and improve their technology. For example,
it is suggested that a religion such as Protestantism, with its emphasis on hard work, thrift, and
the view that entrepreneurial success is a signal of God’s preference, may encourage people much
more effectively than a religion such as Catholicism. In this view, countries with the “right”

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religion will inherently grow more than others. Alternatively, the amount of trust that people
have in their fellow citizens is suggested to be important. In particular, countries where people
don’t trust their fellow citizens are bound to grow less, since citizens will be less encouraged to
enter in the various business relations needed to accumulate physical and human capital and to
invent and adopt new technologies.
Supporters of the geography hypothesis believe that there are geographical conditions of the
land that may be more or less conducive to the accumulation of physical and human capital, and
to the improvement of technology. For example, it is claimed that spurring growth is inherently
more difficult at the tropics, where soil quality is typically poor and the disease environment
quite challenging for human beings. This claim is, prima facie, consistent with the following
figure, showing that all of the richest countries in the world happen to be outside of the tropics.

Figure 9: Source: Sachs (2001)

A second version of the geography hypothesis takes a longer-run perspective. It suggests that
a favourable plant and animal environment helped Europe discover agriculture some 4000 years
before, say, Latin America. The fact that they started early may then contribute to explain why
they are richer nowadays.
Finally, supporters of the institutions hypothesis are critical of the alternative hypothesis.
They suggest that luck cannot matter much over the long run, and that it is possible to find

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pairs of regions with very similar culture and geography, but with very different levels of wealth.
A striking example of this is provided by the two Koreas pictured at night, reported in the next
figure. The very different level of lighting in the two countries suggests that someone crossing
the border from North into South would observe a sharp increase in economic activity, and thus
in per capita GDP. And yet the regions to the North and South of the border are geographically
and culturally very similar, having being divided by exogenous reasons in the mid 20th century.

Figure 10: Source: internet

Supporters of the institutions hypothesis suggest that the really necessary pre-condition for
sustained economic growth is good economic and political institutions. By economics institutions,
it is meant those rules and structures that allow markets to work well. Good economic institutions
are, for example, well-defined property rights, contestable markets, an efficient judiciary, efficient
financial markets, an accessible and efficient education system. By political institutions, we
mean the rules that regulate the way in which political power is allocated in a country. Good
political institutions are those that make sure that decision makers (he central government but
also all other decision makers in the economy) are responsive to a wide variety of interests in
society. According to the institutionalist argument, good economic institutions are needed for
an economy to grow, but you can only have good economic institutions if you have good political
institutions. That is because if political institutions are bad, decision-makers will act in their own

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interest as opposed to the interest of society, and this will induce them to create bad economic
institutions in order to benefit from them.
The institutional explanations has received much attention in recent years, and we are going
to review it in detail. We are going to review theories (no math involved here!) of how political
institutions influence economic institutions (and vice-versa), and how do the two evolve over time.
Going back to history, we will then see how, according to the institutionalist argument, Western
Europe developed good institutions in the 17th and 18th century, paving the way for the industrial
revolution. We will also see how, through colonial empires, Western Europe exported both good
and bad institutions around the world. Thus, according to the institutionalist argument, Western
Europe may be held “responsible” for both success stories such as the USA, and less successful
cases such as, say, Guatemala.

Part III (Lecture 20): assessing current growth.

In this final part, we will try to use the knowledge developed in the previous two parts to
give an answer to some key questions for the future of the world economy. In particular, will
sustained economic growth continue in the future? Are China and Latin America going to catch
up to the West? What is really going to help regions such as Africa to develop?

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References

• Maddison, Angus (2006). “The World Economy: A Millennial Perspective (Volume A);
Historical Statistics (Volume B)”, OECD Development Centre Studies, OECD, Paris.

• Pomeranz, Kenneth (2000). The Great Divergence: China, Europe, and the Making
of the Modern World Economy, Princeton University Press (particularly the introduc-
tion).

• Sachs, Jeffrey D. (2001). Tropical Underdevelopment, in NBER Working Papers, No.

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