Growth and Development

In Long-Run Historical Perspective

Lecturer: Dr. Roberto Bonfatti

Lecture 1
Introduction and Course Contents
Why this module

Source: Maddison (2006)

Why this module

I Per capita GDP: a commonly used measure of the wealth

of a country.

I Main fact to notice: USA and Western Europe (WE) much

richer than most other places!

I Two possible explanations:

I USA and WE bound by nature to be richer than most other
places.
I USA and WE had a more favourable history than most
other places.
Why this module

Source: Maddison (2006)

Why this module

I Everyone poorer in 1000, but equally importantly,

China/India richer than USA and WE!

I Thus, USA and WE not bound by nature to be richer than

most places.

I So what happened between 1000 and 2000?

Why this module

Source: Maddison (2006)

Why this module

I By 1820, WE and the USA 2x as rich as China.

I Still a far cry from the 8X and 6x of 2000.

I And some historians (e.g. Kenneth Pomeranz) even

dispute that USA and WE were richer than China in 1820!
Why this module

Source: Maddison (2006)

Why this module

I By 1900, USA and WE 8x and 6x richer than China!

I 19th century: emergence of sustained economic growth

in USA and WE but not in most other places.

I This led to the called Great Divergence, hence the current

distribution of wealth.
Why this module

Source: Maddison (2006)

Why this module

I 20th century: sustained economy growth continued, and it

extended to most other places.

I Thus, similar distribution of income in 2000 and in 1900.

I Can anyone spot another amazing fact in the figures

above?
Why this module

Source: Maddison (2006)

Why this module

Source: Maddison (2006)

Why this module

I Astonishing that sustained economic growth emerged in

USA/WE earlier than anywhere else.

I But even more astonishing that it emerged at all!

I Average income of only US $ 600 in 1750 AD suggests

SEG is absolute novelty in human history.
Why this module

I One final fact...

I USA and WE 8x and 6x richer than China in 2000;

I But is that staying constant, or is it changing?

Why this module

Source: Maddison (2006)

Why this module

I China is rapidly catching up;

I USA and WE 12x and 9x richer in 1990, but are now only
5x and 3x!

I Similar pattern: other BRICS countries (Brazil, Russia,

India and South Africa);
Key facts

I Fact 1:
I Until the 130,000 BC - 1750 AD: economic growth almost
zero;
I 1750 - : emergence of sustained economic growth;

I Fact 2:
I Sustained economic growth emerged much earlier in USA
and WE than in most other places;
I Sustained economic growth is the reason why USA and
WE are much richer today than most other places.

I Fact 3: countries like the BRICS are now rapidly

catching up.
Key questions

1. Why has sustained economic growth only emerged after

1750?

2. Why has sustained economic growth emerged in some

countries much earlier than in others?

3. Will countries like the BRICS fully catch up to, or overtake,

WE and the USA?
Outline of the course

I Part I (lectures 2-10): proximate causes of growth (this

section involves some math, next two lectures will give you
an idea of the level);

I Part II (lectures 11-19): fundamental causes of growth.

I Part III (lecture 20): assessing current growth.

Part I: proximate causes

I How can sustained economic growth (in per capita GDP)

happen?

I In other words: what are the proximate causes of growth?

I Answer depends on: what kind of an economy we are

looking at.
Part I: proximate causes

I Model of a pre-18th century, traditional economy:

labor force (L)

technology
GDP
(A)

land (X )

I GDP ↑ if and only if L ↑, X ↑, or A ↑ (or a combinations).

But X ↑ cannot go on forever, and L ↑ may have negative
impact on per capita GDP.

I Thus, A ↑ only possible cause of SEG.

Part I: proximate causes

I Key theoretical finding: even continuous A ↑ does not lead

to SEG in this economy.

I This finding also known as Malthusian trap.

I Malthusian trap may explain absence of SEG until the 18th

century.
Part I: proximate causes

I Model of a post-18th century, modern economy:

labor force (L)

technology
physical capital (K ) GDP
(A)

human capital (H)

I GDP ↑ if and only if L ↑, K ↑, H ↑, or A ↑ (or combinations).

I Thus, K ↑, H ↑, and A ↑ all potential causes of SEG.

Part I: proximate causes

I Key result: K ↑, H ↑, and A ↑ can all lead to SEG in this

economy.

I Will show how a traditional economy can convert into a

modern economy.

I Will develop a model of a modern economy telling us how

fast will K ↑, H ↑, and A ↑ be, and their relative importance.
Part I: proximate causes

I Transition from traditional to modern economy can explain

emergence of sustained economic growth in 18th century.

I Industrial revolution (1750-1850) marked this transition,

first in Britain then in other WE countries and the USA.

I K ↑, H ↑, and A ↑ main drivers of growth in 19th/20th

century.
Part I: proximate causes

I But why did this happen earlier in WE and the USA than
elsewhere? Why does is still happen in some countries
more than in others?

I Ongoing debate in economics, about pre-conditions that

must be in place for K ↑, H ↑, and A ↑ to take place.

I Such pre-conditions also known as fundamental causes

of growth.
Part II: fundamental causes

I Four types of fundamental causes.

I Some people believe it’s just down to luck.

I Other people emphasise culture, geography or

institutions.
Part II: fundamental causes

Luck

I Argument: a degree of luck is needed for countries to be

able to accumulate K and H, and to improve A.

I Example 1: machines used in a network, e.g. the

telephone.

I Example 2: bad political leaders.

Part II: fundamental causes

Culture

I Argument: some culture better than others at inducing

people to accumulate K and H, and to improve A.

I Example 1: Protestantism versus Catholicism.

I Example 2: level of trust in other people.

Part II: fundamental causes

Geography

I Argument: some geographical conditions more conducive

than others to the accumulation of K and H, and to the
improvement of A.

I Example 1: hard to grow at the tropics.

I Example 2: favourable plant and animal environment

helped Europe develop agriculture before others.
Part II: fundamental causes

Source: Sachs (2001)

Part II: fundamental causes

Institutions

I Argument:
I Luck cannot matter much in the long-run, and many
neighbouring regions with similar culture and geography
have been performing very differently.
I What matters is good political and economic institutions.

I Good political institutions: government responsive to a

wide range of interests, capable of delivering effective
health, infrastructure, education, etc.

I Good economic institutions: well-defined property rights,

contestable markets, efficient judiciary.
Part II: fundamental causes
Part II: fundamental causes

I Following the literature, will put somewhat more emphasis

on institutional explanation.

I Theoretical perspective: how do institutions affect growth,

how do they evolve over time.

I Historical perspective:
I How WE developed good institutions in the 17th and 18th
century.
I How WE exported both good and bad institutions
throughout the world.
Phase III: assessing current growth

I Will sustained economic growth continue in the future?

I Will China and Latin America fully catch up to/overtake the

West?

I How can we help poor countries to develop?

Admin stuff

I Synthetic lecture slides available before each lecture,

detailed lecture notes available after.

I Problem sets 1 and 2 to be solved at home, and discussed

in tutorials. Problem set 3 to be handed in for marking.

I Want to do really well in the exam? I mean beat the

current 80 record?
I Come to lecture.
I Study all ∗ items in reading list.
I Solve all problem sets, seek feedback on them.
I Use office hours to discuss any doubt.
Admin stuff

Welcome to the module!

References

I Maddison, Angus (2006). “The World Economy: A Millennial Perspective (Volume A); Historical Statistics
(Volume B)”, OECD Development Centre Studies, OECD, Paris.
I Pomeranz, Kenneth (2000). The Great Divergence: China, Europe, and the Making of the Modern World
Economy, Princeton University Press (particularly the introduction).
I Sachs, Jeffrey D. (2001). Tropical Underdevelopment, in NBER Working Papers, No. 8119.