The Novelty Of Modern Economic Growth

If we are to understand why a vast gap between rich and poor exists today, we must return to the very recent period of human history when this divide emerged. The past two centuries, since around 1800, constitute a unique era in economic history, a period the great economic historian Simon Kuznets famously termed the period of modern economic growth. Before then, indeed for thousands of years, there had been virtually no sustained economic growth in the world, and only gradual increases in the human population. The world population had risen gradually from around 230 million people at the start of the first millennium in A.D. 1, to perhaps 270 million by A.D. 1000, and 900 million people by A.D. 1800. Real living standards were even slower to change. According to Maddison, there was no discernible rise in living standards on a global scale during the first millennium, and perhaps a 50 percent

Figure 1: World Population

Figure 1: World Population

increase in per capita income in the eight-hundred-year period from A.D. 1000 to A.D. 1800.

In the period of modern economic growth, however, both population and per capita income came unstuck, soaring at rates never before seen or even imagined. As shown on figure 1, the global population rose more than sixfold in just two centuries, reaching an astounding 6.1 bil lion people at the start of the third millennium, with plenty of momentum for rapid population growth still ahead. The world's average per capita income rose even faster, shown in figure 2, increasing by around nine times between 1820 and 2000. In today's rich countries, the economic growth was even more astounding. The U.S. per capita income increased almost twenty-five-fold during this period, and Western Europe's increased fifteen-fold. Total worldwide food production more than kept up with the booming world population (though large numbers of chronically hungry people remain until today). Vastly improved farm yields were achieved on the basis of technological advances. If we combine the increases in world population and world output per person, we find that total economic activity in the world (the gross world product, or GWP) rose an astounding forty-nine times during the past 180 years.

Figure 2: World Average per Capita Income

Figure 2: World Average per Capita Income

The gulf between today's rich and poor countries is therefore a new phenomenon, a yawning gap that opened during the period of modern economic growth. As of 1820, the biggest gap between the rich and poor—specifically, between the world's leading economy of the day, the United Kingdom, and the world's poorest region, Africa—was a ratio of four to one in per capita income (even after adjusting for differences in purchasing power). By 1998, the gap between the richest economy, the United States, and the poorest region, Africa, had widened to twenty to one. Since all parts of the world had a roughly comparable starting point in 1820 (all very poor by current standards), today's vast inequalities reflect the fact that some parts of the world achieved modern economic growth while others did not. Today's vast income inequalities illuminate two centuries of highly uneven patterns of economic growth.

Figure 3: GDP per Capita by Region in 1 82 0 and 1998

Figure 3: GDP per Capita by Region in 1 82 0 and 1998

This inequality is evident in the bar chart in figure 3. The height of the first bar indicates the level of per capita income in 1820, and the second in 1998, using Maddison's estimates. The number in parentheses at the top of the second bar is the average annual growth rate of the region (between 1820 and 1998). Three main points stand out:

• All regions were poor in 1820

• All regions experienced economic progress

• Today's rich regions experienced by far the greatest economic progress

What do I mean by "highly uneven" economic growth across regions between 1820 and 1998? Even small differences in annual economic growth rates, if sustained for decades or centuries, eventually lead to huge differences in the levels of economic well-being (as measured here by the average per capita income in a society). The per capita gross national product of the United States, for example, grew at an annual rate of around 1.7 percent per year during the period 1820 to 1998. This led to a twenty-five-fold increase in living standards, with per capita incomes rising from around $1,200 per person in 1820 to around $30,000 today (in 1990 dollars). The key for the United States to become the world's richest major economy was not spectacularly fast growth, such as China's recent achievement of 8 percent growth per year, but rather steady growth at a much more modest 1.7 percent per year. The key was consistency, the fact that the United States maintained that income growth rate for almost two centuries.

By contrast, the economies of Africa have grown at an average of 0.7 percent per year. This difference may not seem like much compared with 1.7 percent per year in the United States, but over a period of 180 years a small difference in annual growth leads to huge differences in income levels. With growth of 0.7 percent per annum, Africa's initial income (roughly $400 per capita) increased by little more than threefold, to roughly $1,300 per capita as of the year 1998, compared with an almost twenty-five-fold increase in the United States. Today's twenty-fold gap in income between the United States and Africa, therefore, results from a three-fold gap as of 1820, which was magnified seven tiroes by the difference in annual growth rates of 1.7 percent in the United States versus 0.7 percent in Africa.

The crucial puzzle for understanding today's vast inequalities, therefore, is to understand why different regions of the world have grown at different rates during the period of modern economic growth. Every region began the period in extreme poverty. Only one sixth of the world's population achieved high-income status through consistent economic growth. Another two thirds have risen to middle-income status with more modest rates of economic growth. One sixth of humanity is stuck in extreme poverty, with very low rates of economic growth during the whole period. First we must understand why growth rates differ over long periods of time so that we can identify the key ways to raise economic growth in today's lagging regions.

Let me dispose of one idea right from the start. Many people assume that the rich have gotten rich because the poor have gotten poor. In other words, they assume that Europe and the United States used military force and political strength during and after the era of colonialism to extract wealth from the poorest regions, and thereby to grow rich. This interpretation of events would be plausible if gross world product had remained roughly constant, with a rising share going to the powerful regions and a declining share going to the poorer regions. However, that is not at all what happened. Gross world product rose nearly fifty-fold. Every region of the world experienced some economic growth (both in terms of the overall size of the economy, and even when measured per person), but some regions experienced much more growth than others. The key fact of modern times is not the transfer of income from one region to another, by force or otherwise, but rather the overall increase in world income, but at a different rate in different regions.

This is not to say that the rich are innocent of the charge of having exploited the poor. They surely have, and the poor countries continue to suffer as a result in countless ways, including chronic problems of political instability. However, the real story of modern economic growth has been the ability of some regions to achieve unprecedented long-term increases in total production to levels never before seen in the world, while other regions stagnated, at least by comparison. Technology has been the main force behind the long-term increases in income in the rich world, not exploitation of the poor. That news is very good indeed because it suggests that all of the world, including today's laggard regions, has a reasonable hope of reaping the benefits of technological advance. Economic development is not a zero-sum game in which the winnings of some are inevitably mirrored by the losses of others. This game is one that everybody can win.

On the Eve of Takeoff

Until the mid-1700s, the world was remarkably poor by any of today's standards. Life expectancy was extremely low; children died in vast numbers in the now rich countries as well as the poor countries. Many waves of disease and epidemics, from the black death of Europe to smallpox and measles, regularly washed through society and killed mass numbers of people. Episodes of hunger and extreme weather and cli mate fluctuations sent societies crashing. The rise and fall of the Roman Empire, for famed twentieth-century historian Arnold Toynbee, was much like the rise and decline of all other civilizations before and since. Economic history had long been one of ups and downs, with growth followed by decline rather than sustained economic progress.

John Maynard Keynes wrote about this virtual stagnation of human economic progress in his 1930 essay on the Economic Possibilities for Our Grandchildren:

From the earliest times from which we have record, that, say, the two thousand years before Christ, down to the beginning of the eighteenth century, there was no really great change in the standard of living of the average man living in the civilized centers of the earth. Ups and downs, certainly visitations of plague, famine and war, golden intervals, but no progressive violent change. Some periods perhaps fifty percent better than others, at the utmost a hundred percent better in the four thousand years that ended, say, in A.D. 1700.

He also pinpointed technology as the reason for this long-term stasis:

The absence of important technological inventions between the prehistoric age and 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 and the wheel, the oar, the sail, leather, linen and cloth, bricks and pots, gold and silver, copper, tin, and lead—and iron was added to the list before one thousand B.C.—banking, statecraft, mathematics, astronomy, and religion. There is no record when we first possessed these .. .

What changed was the onset of the Industrial Revolution, supported by a rise in agricultural productivity in northwestern Europe. Food yields rose with systematic improvements in agronomic practice, including the management of soil nutrients through improved crop rotations. The dramatic breakthrough came in England around 1750, when Britain's nascent industry first mobilized new forms of energy for production at scales that had never before been achieved. The steam engine marked the decisive turning point of modern history. By mobilizing a vast store of primary energy, fossil fuels, the steam engine unlocked the mass production of goods and services on a scale beyond the wildest dreams of the preindustrial era. Modern energy fueled every aspect of the economic takeoff. Food production soared as fossil fuel energy was used to produce chemical fertilizers; industrial production skyrocketed as vast inputs of fossil fuel energy created equally vast powerhouses of steel, transport equipment, chemicals and pharmaceuticals, textile and apparels, and every other modern manufacturing sector. By the early twentieth century, the service industries, including modern information and communications technologies, were powered by electrification, itself a breakthrough of the fossil-fuel age.

As coal fueled industry, so, too, industry fueled political power. The British Empire became the global political manifestation of the Industrial Revolution. Britain's industrial breakthrough, unique in the world as of the early nineteenth century, created a huge military and financial advantage that allowed Britain to expand its control over one sixth of humanity at the peak of the empire during the Victorian era.

Why was Britain first? Why not China, which was the world's technological leader for about a thousand years, between A.D. 500 and A.D. 1500? Why not other centers of power on the European continent or in Asia? This question is much debated among economic historians, but a few good answers are evident, and they provide clues to the deeper underpinnings of the Industrial Revolution.

First, British society was relatively open, with more scope for individual initiative and social mobility than most other societies of the world. The fixed social orders of the feudal era had weakened enormously or disappeared entirely by 1500, at a time when serfdom was still the rule through much of Europe. Even more rigid social hierarchies, such as India's caste system, were common in other parts of the world.

Second, Britain had strengthening institutions of political liberty. Britain's parliament and its traditions of free speech and open debate were powerful contributors to the uptake of new ideas. They were also increasingly powerful protectors of private property rights, which in turn underpinned individual initiative.

Third, and critically, Britain became one of the leading centers of Europe's scientific revolution. After centuries in which Europe was mainly the importer of scientific ideas from Asia, European science made pivotal advances beginning in the Renaissance. Modern physics emerged from the astronomical discoveries of Copernicus, Brahe, Kepler, and Galileo. With Britain's political openness, speculative scientific thinking was given opportunity to thrive, and the scientific advances on the Continent stimulated an explosion of scientific discovery in England. The decisive breakthrough came with Isaac Newton's Principia Mathematica in 1687, one of the most important books ever written. By showing that physical phenomena could be described by mathematical laws, and by providing the tools of calculus to discover those laws, Newton set the stage for hundreds of years of scientific and technological discovery, and for the Industrial Revolution that would follow the scientific revolution.

Fourth, Britain had several crucial geographical advantages. First, as an island economy close to continental Europe, Britain enjoyed low-cost sea-based trade with all parts of Europe. Britain also had extensive navigable river ways for internal trade and enjoyed a highly favorable environment for agriculture, with a combination of plentiful rainfall, an ample growing season, and good soils. Another crucial geographical advantage was Britain's proximity to North America. The new settlements in North America provided vast new territories for food production and raw materials such as cotton for British industry, and they were the safety valve that facilitated the exodus of impoverished people from the British countryside. As England's own agricultural productivity grew, with more food produced by fewer people, millions of landless poor went to North America.

In his seminal 1776 work, The Wealth of Nations, Adam Smith referred to Britain's natural advantages:

England, on account of the natural fertility of the soil, of the great extent of the sea-coast in proportion to that of the whole country, and of the many navigable rivers which run through it and afford the conveniency of water carriage to some of the most inland parts of it, is perhaps as well fitted by nature as any large country in Europe to be the seat of foreign commerce, of manufactures for distant sale and of all the improvements which these can occasion.

Fifth, Britain remained sovereign and faced lesser risk of invasion than its neighbors. Being an island helped considerably, much the same way that Japan's insular geography allowed it to escape invasion despite numerous attempts from the Asian mainland. Indeed, with a one-century lag, Japan was to play a role similar to Britain's as the leader of Asia's takeoff to modern economic growth on the other side of the Eurasian land mass.

Sixth, Britain had coal, and with the invention of the steam engine, coal freed society from energy constraints that had limited the scale of economic production throughout human history. Before coal, economic production was limited by energy inputs, almost all of which depended on the production of biomass: food for humans and farm animals and fuel wood for heating and certain industrial processes. Wind power could also be harnessed for sea transport, and wind and water power could be harnessed for some industrial processes. None of these energy sources, however, could unleash the potential for mass production that coal did.

Britain's advantages, in summary, were marked by a combination of social, political, and geographical factors. British society was relatively free and politically stable. Scientific thinking was dynamic. Geography enabled Britain to benefit from trade, productive agriculture, and energy resources in vast stocks of coal. Other parts of the world were not as fortunate to have this confluence of favorable factors. Their entry into modern economic growth would be delayed. In the most disadvantaged environments, modern economic growth has been delayed until today.

The Great Transformation

The combination of new industrial technologies, coal power, and market forces created the Industrial Revolution. The Industrial Revolution, in turn, led to the most revolutionary economic events in human history since the start of agriculture ten thousand years earlier. Suddenly, economies could grow beyond long-accustomed bounds without hitting the biological constraints of food and timber production. Industrial production grew rapidly, and the power of economic growth spilled out from Great Britain to all parts of the world. Societies the world over were fundamentally changed, often tumultously.

The Industrial Revolution, and the modern economic growth that followed, has changed the way people live in every fundamental sense: where and how they live, what kind of work or economic activity they perform, how they form families. In Britain first, and then elsewhere, industrialization meant a shift of people from overwhelmingly agrarian activities to industrial activities, giving rise to urbanization, social mobil ity, new gender and family roles, a demographic transition, and specialization in labor.

Modern economic growth is accompanied first and foremost by urbanization, that is, by a rising share of a nation's population living in urban areas. There are two basic reasons why economic growth and urbanization go hand in hand. The first is rising agricultural productivity. As food production per farmer rises, an economy needs fewer and fewer farmers to feed the overall population. As food production per farmer rises, food prices fall, inducing farmers and especially their children to seek employment in nonfarm activities. The second is the advantage of high-density urban life for most nonfarm economic activities, especially the face-to-face demands of commerce and other parts of the service sector. Sparsely populated rural areas make good economic sense when each household needs a lot of land for farm production. But they make little sense when people are engaged mainly in manufacturing, finance, commerce, and the like. Once the labor force is no longer engaged mainly in food production, it is natural that the bulk of the population will relocate to cities, drawn by higher wages that in turn reflect the higher productivity of work in densely settled urban areas.

Modern economic growth has also produced a revolution in social mobility. Established social rankings—such as the fixed hierarchical divisions between peasants and gentry, or within the Indian caste structure, or in the social orders of nobility, priests, merchants, and farmers that characterized many traditional Asian societies—all unravel under the forces of market-based modern economic growth. Fixed social orders depend on a static and largely agrarian economic setting where little changes in living standards or technologies from one generation to the next. They cannot withstand the sudden and dramatic bursts of technological change that occur during modern economic growth, in which occupations and social roles shift dramatically from one generation to the next, rather than being inherited by sons from fathers and daughters from mothers.

One aspect of changing social mobility requires special note, the change in gender roles. Traditional societies tend to be strongly differentiated in gender roles, with women almost always getting the short end of the deal. In settings where the total fertility rate—the average number of children per woman—is typically at least five, and often much higher, women spend most of their adult lives rearing children. Traditionally homebound, women live lives of back-breaking labor on the farm, endless walking to collect fuel wood and water, and child rearing. With modern economic growth, this dynamic changes. Women can avail themselves of urban-based employment, as in the case of the young women in the apparel factories of Dhaka, leading them ultimately toward social and political empowerment.

The changes in living conditions and economic activities lead to new realities in family structure as well. The age of marriage is typically delayed, and sexual relations are transformed, with greater sexual freedom much less directly linked to child rearing. Fewer generations of family members live under one roof. And crucially, the desired number of children changes remarkably as families move from rural to urban settings. In rural societies, large families are almost always the norm. In urban societies, families choose to have fewer children. This is the crux of the demographic transition, one of the most fundamental of all social changes during the era of modern economic growth.

One more crucial element occurs with deep structural change: the division oflaborincreases, as people become more and more specialized in their skills. The talents of a poor rural farmer in Africa today, or in Scotland at the time of Adam Smith, are truly marvelous. These farmers typically know how to build their own houses, grow and cook food, tend to animals, and make their own clothing. They are, therefore, construction workers, veterinarians and agronomists, and apparel manufacturers. They do it all, and their abilities are deeply impressive.

They are also deeply inefficient. Adam Smith pointed out that specialization, where each of us learns just one of those skills, leads to a general improvement of everybody's well-being. The idea is simple and powerful. By specializing in just one activity—such as food raising, clothing production, or home construction—each worker gains mastery over the particular activity. Specialization makes sense, however, only if the specialist can subsequently trade his or her output with the output of specialists in other lines of activity. It would make no sense to produce more food than a household needs unless there is a market outlet to trade that excess food for clothing, shelter, and so forth. At the same time, without the ability to buy food on the market, it would not be possible to be a specialist home builder or clothing maker, since it would be necessary to farm for one's own survival. Thus Smith realized that the division of labor is limited by the extent of the market (that is, by the ability to trade), whereas the extent of the market is determined by the degree of specialization (and hence, productivity).

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