HISTORY OF ECONOMIC DEVELOPMENT LECTURE 1

1. HISTORY OF ECONOMIC DEVELOPMENTLECTURE 1 Se Yan (Peking University) Fall 2009

2. My contact information • http://www.seyan.info • http://course.pku.edu.cn • Email: seyan@gsm.pku.edu.cn • Office phone: 62757764 • Rm 402, Guanghua New Bldg

3. Overall Introduction • What is this course • Why should you take this course • What we are not going to cover • What we are going to cover • Responsibilities • The Scoop of our topics and methods

4. Why you might want to take this course • Interested in Long term Economic Growth • Interested in Institutional analysis • Interested in the interaction between Economic Theory and long term growth • Have to fulfill the requirement!

5. What we are not going to cover • This is not a bus tour • The whole world, the past centuries, in 16 meetings • Its not a time machine • Do not cover continuous spans of time • Its not history of economic thought • Its not an encyclopedia

6. What is this course about? • New Economic History: more than “Cliometrics” • Using economic theories and methods to study issues in history, obtaining useful lessons from history, and apply to today • Causes, processes, and consequences of economic growth and development from historical perspectives • Methodologies of studying these issues from historical perspectives • Empirical methods • Theoretical methods • Institutional approaches

7. What we are going to do • Syllabus

8. Responsibilities • Mine • Prepare lectures, provide comments, respond!

9. Responsibilities Yours: • Reading and participation (10%) • Bi-Weekly assignment (35%) • Presentations (25%) • Final essay (30%)

10. Reading and Participation • Enrolled students are required to attend lectures and read the assigned papers • I will ask students to discuss questions regarding these papers during lecture

11. Bi-Weekly assignment • You are required to turn a 2-page commentary on one of the papers listed for the week. Your commentary should be a reaction to the reading and provide evaluation of one of the statements listed at the end of syllabus. Your summary should not exceed 100 words (we can all read the paper), most of your commentary should be analysis, evaluation, and a discussion of ‘where to go from here.” The main reason to take courses is to acquire research techniques and research questions. This course is about on the identification of research questions.

12. Presentations • Enrolled students are required to present one paper in the reading list • The importance of presentation skills can never be emphasized enough • Need a huge amount of preparations and practices

13. Final Essay • You are expected to write a prospectus for a research paper that is influenced by your reading in economic history. The paper need not necessarily be on a historical topic. The prospectus should be at least 10 pages in length (double spaced, 12-point font, 1-inch margins). It should describe your research problem, make a case for its analytical significance, briefly survey the relevant literature, pinpoint a body of source material that can be used to explore the problem, and outline your methodological approach.

14. Why Britain? Why not China?

15. Source: Robert E. Lucas, Jr., Lectures on Economic Growth (Cambridge: Harvard University Press, 2002).

16. How to model? One process? Two? More? • Lucas (and many other economists) model as one process. • But might want to posit that there were two or more different processes at work. • A process that enabled Britain to break away • A process that enabled other nations to imitate • Process of imitation might be different in the early 1800s than later on

17. The conventional wisdom: “that industrialization was not the point at which European economic history departed from other Old World trajectories; instead, it represents the full flowering of differences that had been more subtly building for centuries.” Kenneth Pomeranz (paraphrasing Eric Jones), The Great Divergence, p. 31.

18. Challengers dispute claim that European economy more advanced than Chinese (or, more generally, Asian) in Early Modern Period: • Birthrates and life expectancy (for men) were similar in China and Europe in the early modern period. • Each economy had particular technological advantages. • Differences in extent of scientific inquiry overstated. • Markets were as well developed in China as in Europe. • Both economies had comparable transportation systems and in both expansion in the scope of markets led to Smithian growth. • Levels of per capita income in China and Europe were similar.

19. Source: Robert E. Lucas, Jr., Lectures on Economic Growth (Cambridge: Harvard University Press, 2002).

20. Source: Angus Maddison, “Measuring and Interpreting World Economic Performance, 1500-2001,” Review of Income and Wealth, 51 (Mar. 2005), p. 11.

21. Source: Angus Maddison, “Measuring and Interpreting World Economic Performance, 1500-2001,” Review of Income and Wealth, 51 (Mar. 2005), p. 18.

22. Source: Angus Maddison, “Measuring and Interpreting World Economic Performance, 1500-2001,” Review of Income and Wealth, 51 (Mar. 2005), p. 18.

23. Source: Angus Maddison, Chinese Economic Performance in the Long Run (Paris: OECD Development Centre, 1998), p. 25.

24. Maddison’s justification: “None of the authors who have dealt with the Sung period have tried to quantify the achievement in macroeconomic terms. This is understandable as hard evidence is scarce. Nevertheless, it seems useful to advance a quantitative guesstimate because one is otherwise left with qualitative and literary interpretations whose meaning is very elastic. In this situation it is difficult to know the degree to which judgements diverge. The advantage of quantification is that it helps to sharpen the focus of debate.” Source: Angus Maddison, Chinese Economic Performance in the Long Run (Paris: OECD Development Centre, 1998), p. 25.

25. Source: Angus Maddison, Chinese Economic Performance in the Long Run (Paris: OECD Development Centre, 1998), p. 25.

26. Maddison’s counterattack: “Pomeranz relies mainly on illustrative evidence and partial indicators of performance to back his judgement. There are only four tables with no attempt at macro-quantification (except for his comparison of life expectancy).” Source: Angus Maddison, The World Economy: Historical Statistics (Paris: OECD Development Centre, 2003), p. 249.

27. What evidence do the revisionists offer that Chinese per capita income was equivalent to European in 1750? • Comparable life expectancies • Comparable shares of household income spent for non-necessities • Per capita consumption of goods like tea and sugar higher in China than in Europe, though not Britain • Per capita consumption of textiles comparable • Households possessed similar quantities of durables—e.g. furniture

28. Sugar Consumption per Capita (in pounds) Source: Pomeranz, Great Divergence, pp. 118-22.

29. Source: Stephen Broadberry and Bishnupriya Gupta, “The Early Modern Great Divergence: Wages, Prices and Economic Development in Europe and Asia, 1500-1800,” Economic History Review, 59 (Feb. 2006), p. 19.

32. Pomeranz’s conclusion: “Far from being unique, then, the most developed parts of western Europe seem to have shared crucial economic features … with other densely populated core areas in Eurasia. Furthermore, there is no reason to think that these patterns of development were leading ‘naturally’ to an industrial breakthrough anywhere. Instead, all these core areas were experiencing modest per capita growth, mostly through increased division of labor, within a context of basic technological and ecological constraints that markets alone could not solve” (Great Divergence, p. 107).

33. Then, why Britain? Why not China? • Bob Allen: Wage differentials • Phil Hoffman: Military demands • Justin Lin: Supply side • A problem NEVER resolved

34. Cross-country differentials: Traditional Development Perspective • Societies are poor because • inefficient contractual arrangements • dysfunctional credit markets • lack of investment in new technologies • poor health and human capital • But why?

35. Solow Growth Model: Past and Present • Baseline Solow model; growth driven by: – capital accumulation – exogenous technological progress • Augmented Solow model; also – human capital • Vast cross-country variations because of: – Physical capital differences (poor countries don’t save enough) – Human capital differences (poor countries don’t invest enough in education and skills) – “Technology” differences (poor countries don’t invest enough in R&D and technology adoption, and don’t organize their production efficiently)

36. Technological Progress • At the heart of long run growth • Raises productivity and wages • Delivers new goods and services • Promotes greater leisure and longer life in good health • Ultimate source of growth and development in economic history

37. Technology and Development • To understand the wealth and poverty of nations, we have to investigate technological differences • Poor nations are poor because • they do not use the best available technologies • they do not use their technologies and factors efficiently • But why?

38. Technology is not exogenous • Neoclassical macro growth models take “technological progress” as given. • Arrow in the 1960s: technology and knowledge fundamentally different from other goods. • Endogenous growth models assume some structure generating returns to innovation. • But, returns to innovators and technological progress depend on property rights, public good provision (rule of law, education, infrastructure), taxation, etc. • Some institutional structure is implicit in all models, but institutions are so fundamental that they deserve careful study.

39. More Fundamental Explanations • What determined whether/when new technology adopted? • Geography view: importance of ecology, climate, disease environment, geography, in short, factors outside human control. • Institutions view: importance of man-made factors; especially organization of society that provide incentives to individuals and firms. • History’s accidents: some countries are unlucky and trapped in underdevelopment.

40. The Geography Factor

41. The Geography Factor

42. Geographical Factors: Different views

43. Physical Geography & Development • Going back to 11,000 B.C. … • Africa • 5 million more years of separate proto-human existence than on any other continent • Highest human genetic diversity  more diverse inventions? • Americas • The Americas’ greater area (50% greater than Africa’s) and much greater environmental diversity would have given the privilege to Native Americans over Africans • Quick population explosions in the Americas

44. Physical Geography and Development • Eurasia • The world’s largest continent • 2nd longest history of human occupation after Africa • Existence of complex tools and artworks between 20,000 and 12,000 years ago  A practical head start? • Australia/New Guinea • The smallest continent/ continent’s isolation/ shorter history of human occupation  disadvantages • However, Australians and New Guineans had the earliest watercraft in the world. • Cycles of colonization, adaptation, and population explosion Great Leap ForwardDiffusion of population to Eurasia and Africa and a continued development

45. The Institutions Factor

46. Why do institutions matter? • Most of the proposed explanations face a basic problem: unchanging factors (e.g., geography, culture) are difficult to reconcile with sharp changes in well-being (e.g., China after 1979). Stories about the rise of modern growth in England often don’t tell us much about growth’s spread. • Change in economic success in many instances (e.g., reversal among former European colonies, growth takeoffs South Asia) evidence against both the geography and historical accidents views.

47. What are institutions • Institutions are rules, norms, constraints, laws, that govern the behavior of individuals and groups. • North (1990, p. 3): "Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction.“ • Economic institutions: property rights, contract enforcement, etc • Political institutions: form of government, constraints on politicians and elites, separation of powers, etc. • Formal Institutions: codified rules • Informal Institutions: social norms, culture, etc.

48. Institutional variation • Big differences in economic and political institutions across countries. – Enforcement of property rights. – Legal systems. – Corruption. – Entry barriers. – Democracy vs. dictatorship. – Constraints on politicians and political elites. – Electoral rules in democracy.

49. Institutions and Economic Performances

50. Institutions and Economic Performances