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About this book

Widening economic inequalities across the globe today can be understood as the historical consequences of different drivers of growth. This important new text examines the proximate factors of labour, capital and productivity across a range of countries, as well as deeper explanations, from geographical and cultural factors, to colonialism, institutions and the openness of markets and borders. It considers these variables, their effects on rates of growth, and how differing rates of growth will enhance or constrain a country's development.

The author makes the case that long-standing inequalities between countries should be the primary focus for academic study, and that development plans should be produced on a case-by-case basis, reflecting the individual circumstances of countries and regions. Using a wide range of historical and contemporary examples, he highlights the blind spots and assumptions that are liable to compromise the priorities and actions of policy-makers, and provides a route towards effective economic reform and sustained development.

Table of Contents

Introduction

Introduction

Abstract
On my first visit to India as an economics undergraduate in the 1990s, I had £900 to last for three months — a budget of £10 a day. I travelled in unreserved second-class trains which involved an often brutal scramble merely to board the train; actually finding a seat was at best an occasional and unexpected pleasure. I stayed in some fairly seedy hotels, some of which cost not much more than the price of a newspaper at home. But I always treated myself to a good dinner, and in small towns this was often at the best restaurant in town. My fellow diners were the prosperous families of the town with often a driver sleeping in the car waiting for them to finish. If the restaurant was a bit quiet I would often chat with the waiter. Where was I from? What job did my father do? Why was I not married? A common lament I often heard was that the waiter had graduated from university, sometimes having an MBA degree and so was working in a restaurant until finding a job in a ‘respectable profession’. It was odd. Why was a poor student able to eat in a good restaurant among the prosperous and be served his food and drink by a waiter with much better academic credentials?
Matthew McCartney

The Proximate Sources of Growth in the Modern World Economy since 1950

Frontmatter

Chapter 1. Thinking about Growth

Abstract
When we have numbers we can quantify things and compare them. In the 1960s growth in South Korea was 7 per cent per annum and in India around 4 per cent. These numbers allow us to quantify that the Korean economy grew nearly twice as fast as that of India and would lead to the Korean economy doubling in size every decade. Sometimes it is relatively easy to attach numbers (such as numbers of teachers or output of steel) but very often far more difficult (such as the extent of liberalization or democracy or the quality of education). The most important numbers in economics are those for measuring the total size or growth of the economy: gross domestic product (GDP) and sometimes gross national product (GNP). This chapter first shows how economists have tried to measure total GDP and GNP and the problems they have encountered in doing so, then assesses the three main ways of thinking about growth: as a process of change, as progress towards an ideal end-state and as an assumption of progress. Growth gives us a sensation of relentless upward movement but this does not mean that all good things go together in a growing economy. The broader concepts of the good society or well-being require us to think about how economic growth interacts with, causes and in turn is influenced by phenomena such as poverty, inequality, nutritional status and environmental quality.
Matthew McCartney

Chapter 2. Growth in the Modern World Economy since 1950

Abstract
In the period after 1950, most countries had largely recovered from the effects of the Second World War and were turning their attention to renewed growth rather than recovery. Accelerating economic growth became the key policy goal for many developed and developing countries. The newly formed United Nations (UN) made a substantial effort to develop improved and standardized GDP data presentation methods, which made economic data increasingly comparable across countries and made people increasingly aware of the gap between developed and developing countries. Newly emerging post-colonial countries focused on this gap and imbued it with various forms of nationalism to argue that without economic growth (and industrialization) they would remain vulnerable to exploitation and new forms of colonization. The emergence of Development Economics as a distinct discipline within Economics placed growth at the centre of its concerns and gave developing-country governments an array of policy tools to promote growth, including the ‘big push’ popularized by Paul Rosenstein-Rodan; ‘balanced growth’ from Ragnar Nurkse; and the ‘take-off into self-sustained growth’ from Walt Rostow. The politics of the Cold War gave the US government an incentive to promote poverty-reducing growth in its allies and client states, to ward off the temptations of communism. The apparent success of the USSR (the horrors of Stalinism were less well known in 1945) since 1917 gave many developing countries a role model of state intervention and rapid economic growth to aspire to.
Matthew McCartney

Chapter 3. Domestic and Foreign Direct Investment

Abstract
We can all agree that investment is a good thing. Or can we? It is certainly true that exhaustive testing by Levine and Renelt (1992) showed that no other variable had such a close association with economic growth. Many commentators equate more investment with good economics. For them investment is the forgoing of present consumption in order to create an asset that will generate an expected future return. An important part of this definition is ‘create’. Economists use the term ‘investment’ much more specifically than is commonly understood. Investment to an economist does not mean the buying of shares or other assets. This is more properly referred to as ‘portfolio investment’ and represents the transfer of ownership, or part ownership, of existing assets. Investment in this sense is not discussed here. Investment necessarily requires a reduction in resources available for current consumption, and the creation of productive assets to (hopefully) generate higher consumption in the future. So investment proper is all about being virtuous, reducing current consumption to create something for the future, about thinking long term and contributing to sustainable economic growth.
Matthew McCartney

Chapter 4. Population and Economic Growth/Development

Abstract
Many people assume that investment is always and everywhere a good thing; the opposite assumption is often made for population growth. A tabloid newspaper reported in late 2013 that the ‘UK population could DOUBLE to 131 million within a century’. Two-thirds of this increase, it suggested, would result from immigrants and their children. Looking at a longer time span makes the numbers certainly look less dramatic. The population of the earth took 10,000 years to increase from 5 million to 730 million in 1750. Over the next two hundred years the total increased to 3 billion, then doubled again to 6.4 billion in 2000. Current forecasts suggest that the population will peak at 11–12 billion in 2100, and that 90 per cent of the increase will take place in current developing countries. By 2050 the population of Pakistan, for example, is forecast to increase from 160 million to 340 million and India from 1 billion to 1.6 billion. As a proportion of the global total the population of Europe is expected to decline from 12 to 7 per cent and Africa to rise from 13 to 22 per cent.
Matthew McCartney

Chapter 5. Technology and Economic Growth

Abstract
The general pattern of economic growth over the last few decades that we noted in Chapter 2 was: rapid in East Asia; moderate in South Asia; and slow or negative in Latin America and Sub-Saharan Africa. These patterns are paralleled by the success in absorbing technology from the rest of the world, showing that technology has a close link with economic growth. The question of causation, however, is a difficult one. Do new technologies provide new goods and services for export, raise productivity and reduce costs, thus driving economic growth, or does a rapidly expanding economy create the wealth and resources to purchase and create new technologies? New technologies can help a country overcome diminishing returns to investment, permitting sustained economic growth and enabling society to avoid the trade-offs associated with scarce resources. Nevertheless, any act of technological creation is closely linked to destruction; of older technologies, of traditions and existing patterns of employment.
Matthew McCartney

Chapter 6. Education and Health

Abstract
The question of education and health in relation to economic growth can be confused, not by the issue of causality, where the evidence is relatively clear, but by means and ends. There is clear evidence that education and health both cause and are caused by economic growth. This is good news for policymakers, as promoting education is likely to have a positive impact on economic growth and so provide the resources for governments and households to further expand education (as well as incentives to do so if the growth creates well-paid jobs that require a good standard of education). Society can float upwards on a virtuous circle of education and rising incomes. However, the opposite is also true. Poor education and slow economic growth could become locked together in a vicious embrace.
Matthew McCartney

Patterns of Long-term Economic Growth and the Deeper Determinants of Economic Growth

Frontmatter

Chapter 7. The Great Divergence since 1750

Abstract
The fact that there are large inequalities in the contemporary world economy is the central fact of our current economic existence. But when did these inequalities emerge? Some scholars argue that much of the now developing world had incomes little different from now-developed countries as recently as 1750. Inequality, it is claimed, is not long-standing or natural but is the result, perhaps, of better economic policies in the now-developed countries, which suggests poor countries should learn from developed countries what policies work. Or perhaps the experience of colonialism which drained wealth that promoted economic growth in the now-developed countries suggests a moral case for massive amounts of aid to rectify that historical guilt? This chapter finds that Western Europe did not have a particularly high (by historical standards) standard of living in 1750, but it was rising and then already had a significant lead in per capita incomes over the rest of the world. This lead was based on a long history of significant improvements in production, trade and transport technologies in Europe. The lead goes back to as early as 1500 CE or even 1350 CE. Whether this technological dynamism of Europe was indigenous or imported from outside misses the most important point. Over the long term the origin of innovation is less important than receptiveness to ideas, whatever their source, and the ability to build on ideas in a cumulative manner. This is an important lesson for contemporary developing countries, where the conditions of access to technology developed elsewhere, such as the activities of MNCs (Chapter 3) or regimes of intellectual property rights (Chapter 10) are crucial influences on long-term economic growth.
Matthew McCartney

Chapter 8. Economic Growth and Economic Structure since 1750

Abstract
The previous chapter placed inequality into an international perspective and showed how average incomes between countries are affected by centuries of even small differences in economic growth. This chapter looks at one aspect of what growth does within the domestic economy. We have seen in earlier chapters how economic growth may impact on measures of health, education, nutrition and happiness. This chapter confines the discussion to the economic, in particular economic structure.
Matthew McCartney

Chapter 9. Colonialism

Abstract
Most people agree that the subjugation and subsequent domination by one country of another is a bad thing. This simple moral question has obscured a deeper understanding of the nature and impact of colonialism. The bigger question is whether studying the colonial experience helps us to understand centuries of economic growth and their manifestation in contemporary global economic inequalities? This chapter explores various accounts of the influences and impact of colonialism. Acemoglu et al.’s settler/extractive typology is too crude, as case studies of colonialism in India, Korea, and Nigeria demonstrate. Although Marxist thought has long since disappeared from mainstream economic discussion, it offers a rich seam of academic writing and analysis that illuminates the impact of colonialism. The key thematic debates about the impact of colonialism on development in the colonies are the drain of surplus, deindustrialization, diversity and isolation, and human development.
Matthew McCartney

Chapter 10. Institutions

Abstract
Among economists such as Dani Rodrik and particularly economic historians such as Daren Acemoglu and Douglass North, ‘good institutions’ are regarded as the key deep determinant of economic growth. If there is a conventional orthodoxy about the most important deep determinant — then it is institutions. Geography, goes this argument, is not unimportant but the problems manifest by bad geography can be overcome by good institutions. Tropical diseases (to pre-empt discussion from Chapter 11) are more likely to find cures if pharmaceutical firms have incentives to invest in relevant R&D, or countries that are landlocked are more likely to find investors willing to build transport links to overcome that isolation if those investors receive sufficient protection.
Matthew McCartney

Chapter 11. Geography and Economic Resources

Abstract
It seems obvious that where a country is located, its neighbours, its weather and its natural resources must influence economic outcomes. Of all the deep determinants it may seem that geography is the most straightforward to measure for the purposes of economic analysis and statistical testing. For example, average temperatures are easier to measure than culturally inspired inclinations to work hard; the availability of natural resources is easier to gauge than the strength of property rights. However obvious all this may sound, geography is only the latest and recent addition to the list of deep determinants. A very vigorous research agenda over the last decade or so led by scholars such as Paul Collier, Jeffrey Sachs, Jared Diamond and others has created a set of theoretical links to test and an excellent database on economically relevant geographical variables, and they have sought to demonstrate the link between geography and long-run economic growth. The geography hypothesis does not suffer from the problems of causation inherent in discussion of institutions in particular (whether growth leads to good institutions or vice versa). Geography is about the physical attributes of particular locations, such as access to navigable rivers, climate, soil quality and distance from coastlines etc. In statistical work the causal relations are clear because they are not caused by economic and other social variables (in the language of economists, they are exogenous). But, of course there remain deep controversies that make for a fascinating debate.
Matthew McCartney

Chapter 12. Culture

Abstract
The Greek historian Herodotus, writing around 430 BCE, claimed that Greeks were exposed to more changeable weather conditions (than Asians) and were consequently more spirited, flexible and democratic. The cultural legacy of these freedom-loving ancient Greeks, argue some, is preserved today in the individualism and democracy of contemporary Europe and its offshoots in Australia, New Zealand, Canada and the US (Meier, 2009). While Socrates argued that democracy would pool ignorance, Plato believed that reasoned debate among philosopher-kings (not the masses) would lead to a better society. However, since democracy then disappeared from Europe for two thousand years until its revival inspired by the American and French revolutions, ‘it takes a heroically selective reading of history to see a continuous spirit of democratic freedom stretching from classical Greece to the Founding Fathers’ (Morriss, 2010:260). Measuring culture is difficult, as is examining the nature of cause and effect. Economists, nevertheless, need to measure things and give them numbers to see how they relate to economic things such as economic growth.
Matthew McCartney

Chapter 13. International Trade, Openness and Integration

Abstract
Openness provokes widely different responses, depending on what aspects of openness are under discussion. While trade openness has long received much support from economists, it has frequently been viewed with suspicion by industry groups and trade unions threatened by foreign competition. Openness in terms of easier migration is generally supported by business keen to access cheap and educated labour from the global economy but strongly opposed by many who fear the greater competition for jobs and pressure on social services. FDI has been both opposed by nationalist governments anxious to avoid any sign of dependence on big foreign business (such as India’s in the 1970s) and welcomed by nationalist governments keen to promote economic growth, modernization and national glory through accessing new technology (such as India’s in the 1990s and 2000s). Much of this debate has been difficult for economists to engage with, particularly when openness is considered in terms of ‘ideas from other countries’ and so has been left to the more narrative-historical approaches of historians. Good examples of such debates discussed here include the closure of China to the rest of the world after the fifteenth century and the impact of the Spanish Inquisition in Europe from the late fifteenth century.
Matthew McCartney

Conclusion: Eight Principles for Policy-Makers

Abstract
The introduction to this book posed three big questions:
  • When did the massive inequalities in the contemporary world originate?
  • How have a relatively small number of countries managed to achieve such high levels of income and welfare?
  • Why have so many countries remained at low levels of income and welfare?
Matthew McCartney
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