Modern Economic Growth: Causes, Models, and Global Impact
Unit 1: Modern Economic Growth
- What Determines Outcomes?
Modern economic growth: ‘A country’s economic growth may be defined as a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustments. (A sustained rise in output over time)
How is it measured: GDP, Value of all final goods and services produced by an economy in a given time; GDP per capita: Value of all final goods and services produced by an economy in a given time.
Causes:
- Rise in capital per worker by increased investments leads to capital accumulation.
- Increase in productivity enhancing technological innovation.
Ultimate Causes:
- Geography: Further from the equator, the richer we get. Similar logic applies to regional differences within countries (prevalence of diseases, low food productivity and prevalence of pests and parasites) and landlocked regions are among the poorest countries in the world.
- Ecology: Most developed societies are located on the east-west axis (Roman Empire, European and Asian empires). The east-west axis and complementary climate make it easier to transfer crops and animals.
- Imperialism and Colonialism: Imperialism is the rule of authority of an empire or nation over foreign countries. Colonialism is an aspect of imperialism implying the physical possession and population of certain geographical areas.
- Culture: Culture encompasses the ideas, customs, and social behavior of a particular people or society. This includes fertility and marriage, religion (Protestantism: The Protestant ethic was instrumental in the rise of industrial capitalism and generated an incentive for wealth accumulation; Islam: for centuries, it was superior to Europe in many respects).
- Institutions: ‘Institutions are the humanly devised constraints that structure political, economic, and social interaction. They consist of both informal constraints and formal rules.
Unit 2: Malthusian Trap and Smithian Growth
Malthusian Trap: Population and income in pre-industrial economies.
Smithian Growth: Gains from specialization, The Roman Empire as a single market economy, Pandemics and income inequality.
Modern economic growth is a recent phenomenon; before the Industrial Revolution, the world was caught in a Malthusian trap.
Malthusian Model: Food produced using land and labor, supply of land is fixed, the more labor you add to a hectare of land, the more output you get. Output is food and also is the main source of income, and population growth is driven by fertility and mortality rates.
- Fertility increases with incomes, and mortality decreases with incomes (the richer, the longer you live).
Preventive Checks: Deliberate reduction of fertility, chastity, abortions… reduce population growth and increase income.
Positive Checks: Things that kill people, wars, pandemics… reduce population growth and increase incomes.
In a world of limited resources, population growth will drive income to subsistence, but what actually happened is that before the Industrial Revolution, incomes were stagnated.
How do we explain population growth and stagnant incomes in the Malthusian Trap?
One-time technological progress (e.g., invention of the plough) increased the amount of food that can be produced on a fixed amount of land, increase incomes and fertility rise, in the long run, income falls with population growth.
Smithian Growth: The causes of the wealth of nations were: gains from specialization, learning by doing, and trade between producers with different resource endowments and climate.
Limits to Smithian Growth: Extent of market, and the side of the market is constrained by: aggregate demand (population, income), transaction cost (transport, search cost, taxes).
Roman Empire: Imperial expansion generated Smithian growth, and distribution was unequal, and the Roman Empire as a single market economy, imperial expansion drove market integration, and these factors drove specialization within the empire, which increased incomes above subsistence.
Black Death: Record plague, killed around 23 million people, and it reappeared in Europe over the century. Measuring the impact of it is empirically difficult.
Long-run effect: Are generally followed by a long period of depression, generally there is no recovery in about 40 years.
ç
Unit 3: British Industrial Revolution
What was the Industrial Revolution? A process of accumulation of knowledge that led to sustained acceleration of technological process, end of Malthusian trap, start of modern economic growth. It was an age of invention. Important innovations:
- The mule: to spin raw cotton into yarn, reduce hours of labor.
- Steam engine: high amount of coal for use, use in manufacturing and transport.
- Iron and steel industry: make pig iron from iron ore, basis of steelmaking.
When did the Industrial Revolution occur? Roughly in 1750-1850, tangible effect in indicators of living standards, break point of sustained growth occurs in the early 19th century.
Why Great Britain?
- Institutions: End of serfdom, system of labor in the medieval period, peasants tied to land, and Britain abolished serfdom to wage labor. The Glorious Revolution consolidated parliamentary control and limited monarchic absolutism.
- Agriculture: Increased productivity in agriculture led to population growth, increased labor transferred from rural to urban economy and urbanization.
- Science: The scientific revolution was key, the emergence of physics in the 17th century was fundamental for the steam engine.
- Imperialism and Trade: Expansion across the Atlantic was critical, large physical revenue in the British navy allowed for expansion, imperialism secured inputs, provided inputs, provided markets, and reduced trade costs.
2 Explanations: Allen: had a unique price and wage structure that incentivized labor-saving technological innovation. Mokyr: The enlightenment, the practical application of science, and the importance of intuitions drove technological innovation.
British labor was more expensive, and energy capital was very cheap (these give the incentive to invest).
Spread of Industrialization: During the 19th century, more countries followed the experience of Great Britain. The United States was achieved for importing British invention, and an early barrier to spread industrialization was British protection of trade secrets; this was the lag of British technology around the world.
United States: Example of Industrial catch-up in the 19th century, a high wage economy, high agricultural productivity, large size, and climate variation allow specialization.
Belgium: Example of technological adoption, possessed important coal deposits, had to resort to conspiracy to obtain British knowledge know-how, expansion in railway and financial innovation.
France: Singular industrialization experience, lacked chip access to natural resources, industrialization was hindered by the French Revolution and subsequent wars, slower than other countries, and driven by railroad development and cheap supplies of raw materials.
Germany: Industrial catch-up in Europe, from poor to industrial powerhouse, Zollverein in 1833 provided an integrated single market, important natural resources, chemical and electricity innovations, and a banking system opened new markets.
Demographic Transition
Richer countries experience the gradual reduction of fertility rates until they coincide with mortality rates; in lower-income countries, this does not occur. Globally, population growth has been declining since 1960.
Why did fertility decline with income growth? Increase in nutritional status, public health measures (sanitation, clean water), greater knowledge of diseases, and improvement in medicine.
Mortality decline generates population pressure (more children to feed per house, one-time tech progress is not sufficient) and three major demographic responses, out-migration, reduction in marriage, and increase in birth control.
Unit 4: The Great Divergence
What was the Great Divergence? The increasing gap between the income per capita of western European and offshoot countries and the rest of the world.
3 Main Features:
- Relatively recent phenomenon.
- Divergence is increasing over time (rich countries richer than poor).
- Divergence is persistent.
When did it occur? 1800 onwards (Industrial Revolution was a lick accident with important long-run consequences), earlier 1500-1700 (with a combination of economic and demographic factors that set western Europe before industrialization), earlier 1300 (impact of the Black Death).
Little Divergence occurs in Europe and Asia:
- Europe: between west, south, and central Europe, Great Britain most of western Europe from 1650, but it didn´t overtake the richest parts of Europe until 1800.
- In Asia: Japan and China, China on par with the richest in Europe, Japan overtook areas of Asia after 1750.
Some go even further back: real wages suggest that the Black Death was the beginning of the great divergence, some wages increased rapidly and, in some cases, did not decline as much as others after the shock.
Why did it occur? Biogeography: effects of climate, sea access, and topography and timing of transition, infectious diseases higher in the tropics (Tse Tse fly, kills livestock and reduces agricultural productivity) Europe advantages in: coastal trade, navigable rivers, temperate climate, disease patterns, proximity to markets.
Neolithic Revolution: Transition from hunting and gathering to settled agriculture, and biogeographic conditions were fundamental for the location and timing of transition to sedentary agriculture and industrial production. Eurasia however probably had the largest endowment of plants and animals suitable for domestication.
Superior in Eurasia because: Largest landmass on the planet, Mediterranean climate, and east-west orientation.
Consequences: Domesticated plants provided food supply for population growth and also animals, created rising population density complex social organization that allowed for non-agricultural activity and allow the creation of state.
Culture and Institutions: Culture is a set of beliefs, values, and preferences capable of affecting behaviors that are socially transmitted from generations for society. Institutions are formal mechanisms through which social choices are determined and implemented. How are they related can be formal (constitutions and laws, or informal like norms or codes).
2 Kinds of Institutions:
- Economic: determine economic incentives of individuals.
- Political: set the economic institutions.
Inclusive: guaranteed property rights and promoted trust, also drove market integration (reduce transaction costs and lead to market integration, and also increased depth and breadth of factor markets.
Culture and institutions drove human capital development: education (years of schooling and literacy increased long before the Industrial Revolution in Great Britain. Also drove to scientific development, a consequence of the slow rise in human capital was the enlightenment.
The Black Death changed fertility rates in north-western Europe, more households became dependent on wage labor, increased age of marriage, changed the institutional basis of agriculture, increased in bargaining power, lower rents, less obligation, longer leases. It increased the rate of technological innovation, high cost of labor drove labor-saving innovation.
Unit 5: Colonialism and Slavery
Why did countries colonize? Origins: The Silk Road, a terrestrial trade network that connected Asia with Europe, carried silk, yarn … from Asia to Europe. The Mongol empire unified the Silk Road and increased trade with Europe. Disintegration of the Mongol empire cut trade along the Silk Road.
Improvements in shipbuilding and navigations incentive to search new trade routes, initially colonialism was an accident.
Long-run consequences: The reversal of fortune, countries that were richest in 1500 are among the poorest now. Explanation for this:
- Time-varying effects of geography, geography is important when it interacts with technologies, when the technology became available, temperate zones were more productive.
- Institutions, Societies with a social organization that provides encouragement for investment will prosper.
Columbian Exchange
New world pandemics, diseases like malaria, yellow fever, become endemic to the Eurasian population, so the Columbian exchange is the exchange of food and diseases between old and new worlds.
Atlantic Slave Trade
1400-1900, 12 million Africans shipped around the Atlantic from Africa, population density prior to the slave trade, the development of the slave trade network, nationality and destination, and the main destinations over time moved over 4 main phases:
- Spanish Americas during initial trade.
- Brazil during the Dutch economic boom of the 17th century.
- American boom during the British Industrial Revolution.
- Brazilian boom after the abolition of the slave trade.
How did it work? Slaves were bought using ‘trade goods’ from markets on the coast of Africa, slaver traders took slaves trough the Atlantic to the market and sold them, mortality was high on this trips and the profit was very high, it has an important consequence in Africa so the poorest African countries in GDP are among the ones with higher slave export, it generated internal conflict: political instability, weak forms of governance and high levels of ethnic fragment.
Slavery existed for 1000 years, so for the colonization start international slave market, the largest slave-based economies were initially mining of plantations, there was demand of slaves because: high land labor ratios, the mortality rate slaves, demand for crops…
Long-run consequences: It generated structural inequality and it generates poor long-run economic outcomes. Consequences of structural inequality: income inequality current measure are linked to the presence of slave-based plantations activities; Attitudes: current political preferences and levels of racial prejudice are linked to the historical intensity of slavery and education: degree of racial inequality in education linked to historical intensity of slavery.
Unit 6: The First Globalization
Commodity, labor, and capital flows.
What is globalization? International integration of markets in commodities, labor, and capital (factors). A process that generates both winners and losers.
When did it begin? One view: began with European expansion in the 15th century; Another view: began with the Napoleonic war in the 19th century as the spread of globalization increase trade (globalization was interrupted by WW1.
Globalization is driven by two forces:
- Increase in economic size: increased output generates economic surpluses.
- Decreases in distance: relative distance between countries declines, they decline with technology and policy.
The death of distance: Distance between countries can be thought of in terms of cost: transport, and transaction cost fall; Transaction costs can be institutional or policy-induced: tariffs, taxes…
Two forces that have reduced transaction costs:
- Technological innovations: steam shipping, railroads, and telegraph.
- Institutional/policy innovations: gold standard reduced, trade agreements reduced tariffs in commodity markets (gold standard, reduce exchange rate/ free-trade tariffs).
The main consequences of these technological and institutional innovations were: rapid growth of trade and integration of markets for commodities.
Why did people migrate? Wage differentials between old and new world, reduction of transport costs.
Law of one price: If a price differential exists between markets, supply conditions will adjust to reduce the differential.
Gold Standard
Main idea: Central banks fix their exchange rate in relation to gold. Money supply is backed up by gold in central Banks.
Conditions of the system: Central banks commit to guarantee currency convertibility into gold, free gold entry in countries. Consequences: decline of exchange costs = increased trade, induced price instability over the long run.
Unit 7: Globalization Backlash and the Interwar Period
Origins of WW1: The spread of industrialization and globalization in the 19th century generated the roots of economic disintegration in the 20th century, the second phase of the industrial revolution increased competition between European powers and disenfranchised poor and working classes. Increase income inequality rose to historical peaks prior to the war and imperialism generated tension between powers. Technological innovation developed the first major arm race in 1870-1913.
Economies of total war: The development of the War saw the expansion of the role of the state: Driven by massive resource allocation towards war production, imposition of price, wage control and creation of cartels, Victory was conditional on economic resources.
Consequences: Massive loss of life (10 M military, 7 M civil), massive loss of physical capital, shock resulted in reduction of GDP, average of 10 years of recovery of GDP, massive amount of debt and disintegration of global economy, also:
- Pandemics: Spanish flu killed 39 million people pandemics reduce GDP per capita 6%
Paying for the War: There were several strategies countries followed to reduce the debt accumulated during the war and finance reconstruction; raising taxes, selling debt, or print lots of money.
Treaty of Versailles (1919) and London Schedule of Payments (1921). Germany seen as responsible for the war, this restricted military germanyand bill of 33.000 million dollars Germany economy destroyed.
Interwar Inflation
During the War, inflation rose as supplies were disrupted and demand increased (In November 1923 the price level reached over 1 billion times its pre-war level.
Why hyperinflation? Balance of payments: which depreciate exchange rate and increase cost of imports and people print money to cover cost, other view, money creation fueled inflation.
Interwar growth: characterized by: faster growth in neutrals, moderate growth in winner and slow in losers, improvements in productivity and technological innovations, interrupted by great depression.
Rise of Nazis
Three factors, baking crisis, historical persistence of antisemitism, austerity policies
Banking crisis: Diffusion of the American financial crisis hit Germany in summer of 1931, The collapse of Danatbank, triggered banking crisis, The collapse of Danatbank, triggered banking crisis, Danatbank was led by a prominent Jewish banker, Jakob GoldschmidtThe collapse of the bank increased anti-Semitic sentiment in the worse affected parts of Germany.
Antisemitism: Thus, historical experiences with anti-Semitism (culture), interacting with economic conditions, were important determinants of the rise of the Nazis, Anti-Semitism in Germany exhibited long-run persistence; jews blamed for black death.
Austerity: To cope with the banking crisis, Chancellor Brüning implemented program of austerity, cuts in social spending, genitures on health declines and tax rates increased, The Nazis initially campaigned as an anti-austerity party.
Unit 8: Great Depression and Financial Crisis
What was the Great Depression? A major economic crisis that began in the US, went international, from stock market to real markets.
Origins of Great depression: Extreme post-war balance of payment imbalances in Europe, huge trade deficits; major asymmetries in credit markets, with the return of gold standard, most gold went to three main creditor countries (US, UK- and France).
In the US, unemployment was low, prices were stable and growth was exceptional, Declining interest rates following 1920/21 depression, Increasing amounts of US capital are redirected into speculative activity at home.
Warning signs before the crash of 1929 were: Bubbles in asset markets (boom in stock prices) and high levels of debt (high levels of households mortgage debt).
What causes the crash? No clear explanation, the proximate cause was a change in monetary policy, an increase in interest rate in 1928 and sold more than 75% of its stock of government securities.
- Stock market bubble: prices of assets not reflect economic fundamental so investors act like other investors
- Golden fetters: by 1928 many countries rejoined the gold standard, The FED’s move to tighten monetary policy was contrary to the logic of the Gold Standard, France also ‘sterilized’ its gold reserves, From 1928, almost simultaneous global contraction of monetary policy.
Consequences: Deflation: continuous fall in the price level, generated: fall in consumption, higher real wages, increase the real value of debt, after 1929 crash countries experienced sustained deflation.
- Consumption: fell dramatically after the crash, decline in consumption influenced by: expectations, rising debt and lost income
- Investment: fell dramatically also, driven by: increase in real interest rate , and decrease in aggregate demand, this generated increasing unemployment.
- Banking: as crisis unfolded, savings were rapidlyu converted to currency ( many peole attempted to draw on their deposits at the same time, banks forced to liquidate loans many couldn’t, this generate waves of bank failures, reduction of deposits and wealth was destroyed; Roots of bank failure, The structure of the banking system mattered for the intensity of the banking crisis, Those countries that had higher number of branches per bank, higher concentration and larger banks generally did not suffer serious banking crises
Consequences: Dramatic drop in GDP during the following years of crash.
Government response: MONETARY POLICY: reserve requirements, discount (‘interest’) rates and transactions involving government securities (‘bonds’), FISCAL POLICY: levels of taxation and government spending. Exit from the Gold Standard, Returned governments the ability to undertake expansionary monetary policy, and they did.
IN US: New Deal (Roosevelt): coordination of monetary and fiscal policy to increase demand. (exit gold standard, increase government spendings in deficit spending) and Glass-Steagall Act of 1833: separate commercial and investment banking, enacted federal deposit insurance.
Unit 9: The Golden Age of Growth
Europe and soviet industrialization:
Economic effect of WW2: Recovery was quicker, winners about 1 year to recover GDP and loser around 4 years.
What was the golden age growth period? Period of rapid economic growth, of increasing living standards form 1950 to 1973 (high rates of investments and productivity growth).
Where did growth come from? ‘catch-up’ growth, A poor economy has a large potential for copying a rich economy (importing, technology, knowledge, institutions and foreign capital). And Temin developmental deficit.
- Failure of catch up growth: UK GDP gowth 2.5% below EU average
- Success: Germany GDP growth over 5.1% over European average
- Growth was driven by high investment, wage moderation, export growth
Containing communism: Truman doctrine: The US policy for the containment of communism, Post-war instability in Europe: Rapid interwar economic growth in USSR under Stalin (interesting precedent for countries searching for alternatives, awkward fact for United States government).
Marshall Plan: Rationale: Peaceful and prosperous Europe better than a poor and volatile Europe for the containment of USSR. Initially, European dependent on imports of capital goods (machinery, etc.) for reconstruction, Europe also dependent on food imports due to War’s devastating effect on agriculture.
- Aid came with a profound political cost for national economies and central banks: required to sign bilateral pact with US, balance government budgets and restore price stability.
Was the Marshall Plan responsible for the Golden Age of Growth in Europe? The indirect effect was large. The structural adjustment of Western European economies: (gradual multilateral reduction of trade barriers, fiscal reforms, inflation targeting…).
USSR growth in comparative perspective: We can place the USSR (GDP/capita) experience in comparison with other centralized and market economies: USSR consistently below richest countries of W. Europe and ‘offshoots’, but above poorer countries in Asia and Africa.
Russia before Stalin: Large agrarian society, marginal process of industrialization during 19 centuries, Output collapsed during Civil War (1917-22), New Economic Policy (1921): promote recovery, with the help of market (capitalist) forces.
Soviet industrialization: Growth was very rapid during the interwar period (1928-40) and post-War period 1950-70. Investment increased, urban consumption increased, rural consumption stagnated.
3 main aspects of soviet industralization:
- Collectivisation of agriculture: during the first rive year plan, peasants forced to surrender their land to collective farms, state imposed delivery quotes on farms.
(Five years plan: determined direction of investment, development was very rapid first 3 years, rapid GDP growth and consumption actually increased
USSR growth trajectory: During post-war period, economic growth was ‘extensive, Capital investment in heavy industry