Economic Development in

Historical Perspective
 An Evolutionary Biological Approach
to Development
• The physiologist Jared Diamond (1999)
stresses ecology and evolutionary biology,
especially distinctive features of climate,
environment, and wild plants and animals in
explaining the fates of human societies and
their development.
• Despite sub-Saharan Africa’s early head start
as a cradle of human evolution, Eurasia
dominated Africa during the latter half of the
second millennium c.e.
• Eurasia had the fastest migration and
diffusion of technological innovations.
• The Fertile Crescent enjoyed a wealth of
domesticated big mammals, a plethora of
large-seeded grass species suitable for
domestication, a substantial percentage of
annuals, a climate (mild, wet winters and
long, hot, dry summers) favorable to cereals
and pulses, and a wide range of altitudes and
topographies supporting biodiversity and
staggered harvest seasons, factors deficient in
South Africa, Mesoamerica, Australia, and New
Guinea.
 Ancient and Medieval Economic
Growth
• Western Europe declined during the earlier
millennium with the collapse of a cohesive
large-scale polity, the Roman empire, and its
replacement by a fragmented and unstable
political system.
• Urban civilization disappeared, being
replaced by “self-sufficient, relatively isolated
and ignorant rural communities where feudal
lords extracted income in kind from a servile
peasantry”
• China had the highest income per capita
in the world, having developed gunpowder
(but not modern guns), a well-developed
road system, and merchants trading
throughout East Asia. China only
surrendered the world’s lead in GDP to
the United States in the 1890s, when
China had the world’s largest population
of 380–400 million.
• .The West’s superior technology included navigation, ship
building, food processing, banking, accountancy, foreign
exchange and credit markets, diplomatic service, corporate
governance, military technology, insurance, libraries, the
printing press, and improvement in intellectual life and the
spread of universities.
• In about 1500, technological progress and capital formation
quickened, with Europe encountering the Americas, opening
up an enormous area, including new crops (maize, potatoes,
manioc, tomatoes, chillies, peanuts, pineapples, cocoa, and
tobacco) and the exchange of crops and animals among
Europe, the Americas, and Asia.
• Asian institutions and policies, however, were weak,
negatively reinforced by Western colonial and imperial
exploitation, especially from the 18th century onward.
World Leaders in GDP per capita,
1500 to the Present
 Beginnings of Sustained Economic
Growth
• The rapid, sustained increase in per
capita GNP characteristic of modern
economic growth began in the West
(Western Europe, the United States,
Canada, Australia, and New Zealand) 125
to 250 years ago.
• The rest of Asia grew modestly during the
one and one-half centuries before the
mid-20thcentury.
 The West and Afro-Asia: The 19th
Century and Today
• Gross national income per capita for
developed countries in the West in the
first decade of the 21st century is roughly
twelve times that of Afro-Asian low-
income countries, if compared using
international dollars using purchasing-
power parity rates, and about 60 times
that of these low-income economies in
nominal U.S.dollars.
 Capitalism and Modern Western
Economic Development
• A major reason is the rise of capitalism, the
economic system dominant there since the
break up of feudalism from the 15th to the
18th centuries.
• Why was capitalism first successful in the
West?
– The breakdown of the authority of the medieval
Roman Catholic Church, together with the
Protestant Reformation of the 16th and 17th
centuries, stimulated a new economic order.
– Between the 16th and 19th centuries, Western
Europe witnessed the rise of strong national states
that created the conditions essential for rapid and
cumulative growth under capitalism.
– The declining influence of the church coincided
with the Enlightenment, a period of great
intellectual activity in 17th- and 18th-century
Europe that led to the scientific discoveries of
electricity, oxygen, calculus, and so on.
– The philosophical rationalism and humanism of the
Enlightenment, coupled with Protestantism’s
spiritual individualism (the “priesthood of all
believers”), emphasized freedom from arbitrary
authority.
• Intellectual and economic changes led to
political revolutions in England, Holland, and
France in the 17th and 18th centuries that
reduced the power of the church and landed
aristocracy.
• Modern capitalism is distinguished from earlier
economic systems by a prodigious rate of
capital accumulation. During the early
capitalism of the 16th and 17th centuries, the
great flow of gold and silver from the Americas
to Europe inflated prices and profits and
speeded up this accumulation.
THE JAPANESE DEVELOPMENT MODEL
• Japan’s “guided capitalism” under the Meiji emperor, 1868 to
1912, relied on state initiative for large investments in
infrastructure – telegraphs, postal service, water supply,
coastal shipping, ports, harbors, bridges, lighthouses, river
improvements, railways, electricity, gas, and technical
research; for helping domestic business find export
opportunities, exhibit products and borrow abroad, establish
trading companies, and set marketing standards; for
importing machines sold on lenient credit terms to private
entrepreneurs; for laws encouraging freedom of enterprise
and corporate organization; for organizing a banking system
(with the central Bank of Japan); for sending students and
government officials for training and education abroad; and
(in the absence of foreign aid) for hiring thousands of
foreigners to adapt and improve technology under local
government or business direction.
• Keiretsu, formed after World War II, refers
to groups of affiliated companies loosely
organized around a large bank, or vertical
production groups consisting of a core
manufacturing company and its
subcontractors, subsidiaries, and affiliates
THE KOREAN–TAIWANESE MODEL
• The governments of Korea and Taiwan systematically
intervened to further economic development, building
infrastructure, providing tax incentives and subsidized
credit for export manufacturing and other selected
industries, investing heavily in primary education and
other human capital, and maintaining macroeconomic
stability during external shocks (for example, from oil
price increases and American dollar depreciation), thus
restraining inflation and avoiding external debt crises
• Korean government policies were partial to private
conglomerates such as Hyundai, Lucky-Goldstar, and
Daewoo, whereas Taiwan emphasized aid and the
dissemination of research and technology to small-to
medium-sized private and state-owned enterprises
• Korea and Taiwan, also like Japan, have had a
high quality of economic management provided by
the civil service, with merit-based recruitment
and promotion, compensation competitive with
the private sector, and economic policy making
largely insulated from political pressures.
• The experiences of Korea and Taiwan since 1945
reinforce many of the lessons of the Japanese
development model: the importance of guided
capitalism, infrastructure investment,
technological borrowing and learning, universal
primary education, high educational standards,
and market-clearing prices of foreign exchange.
 THE RUSSIAN-SOVIET DEVELOPMENT
MODEL
• The Stalinist development model. The 1917 Communist
revolution in Russia provided an alternative road to
economic modernization, an approach usually
associated with Soviet leader Joseph Stalin from 1924 to
1953. The main features of Soviet socialism, beginning
with the first five-year plan in 1928, were replacing
consumer preferences with planners’ preferences, the
Communist Party dictating these preferences to
planners, state control of capital and land,
collectivization of agriculture, the virtual elimination of
private trade, plan fulfillment monitored by the state
banks, state monopoly trading with the outside world,
and (unlike the Japanese)a low ratio of foreign trade to
GNP.
• The Fel’dman–Stalin investment strategy.
The driving force in G.A. Fel’dman’s
unbalanced growth model, developed for
the Soviet planning commission in 1928,
was rapid increase in investment in
machines to make machines. Long-run
economic growth was a function of the
fraction of investment in the capital goods
industry.
• Indian adaptation of the Soviet investment model.
Jawaharlal Nehru, India’s first prime minister, and
Professor P. C. Mahalanobis, a statistician who
headed the Indian planning commission, tried to
combine the Fel’dman-Stalin investment strategy
with democratic socialism to reduce capital
shortages. The Mahalanobis planning model, like
that of Fel’dman, stressed expanding the
investment share in steel and capital goods.
Eventually, even agriculture was supposed to
benefit from this emphasis, as the production of
inputs, such as fertilizer and farm machinery, was
to increase.
 CHINA’S MARKET SOCIALISM
• Mao’s ideology stressed prices determined by
the state, state or communal ownership of the
means of production, international and
regional trade and technological self-
sufficiency, noneconomic (moral) incentives,
“politics” (not economics) in command,
egalitarianism, socializing the population
toward selflessness, continuing revolution
(opposing an encrusted bureaucracy), and
development of a holistic Communist person.
• “socialism with Chinese characteristics.”
 LESSONS FROM NON-WESTERN
MODELS
• LDCs can selectively learn from these East
Asian countries: some major ingredients of
their successes included high homogenous
standards (especially in science) of primary
and secondary education, able government
officials that planned policies to improve
private-sector productivity, substantial
technological borrowing and modification,
exchange-rate policies that lacked
discrimination against exports, and (in Japan
and Taiwan) emphases on improving the skills
of small and medium-scale industrialists.
The Convergence Controversy

• In 1969, a commission on international development

chaired by Lester Pearson (former Canadian prime
minister) contended that “the widening gap
between the developed and developing countries” is
one of the central issues of our time.
• A key question is whether poor countries grow faster
than rich ones, so that income per capita is
converging. Convergence concurs with the
predominant neoclassical growth model, which
presumes diminishing returns to capital as an
economy develops, and similar technology from one
economy to another.
• RobertBarro(1991)distinguishes between
conditional convergence, with the presence of
control variables, and their absence,
unconditional convergence. With conditional
convergence, holding fertility rates,
education, and government spending as a
share of GDP constant, income per capita in
poor countries grows faster than in rich
countries as expected with diminishing returns
in neoclassical growth theory.