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2 Early Development: No Barriers To Growth

14.2 Early Development: No Barriers To Growth

Development, in economic parlance, is the process of getting a country on a "growth train" that will carry it
sustainably to high and ever-rising incomes for its population. This essentially economic process has many
positive side effects for the quality of life and for political and social freedoms. The Nobel laureate Amartya Sen
defined development as "a process of expanding the real freedoms that people enjoy", adding: "development
can only be evaluated in terms of enhanced freedom."1 Economic development requires the presence of several
factors that will promote and sustain growth: labor, capital, land and natural resources, technology and good
institutions.

The rise of the United States from a group of colonies populated by mainly poor English farmers to the world´s
leading economy is a case study of the interplay among factors of production in economic development. The
United States in its formative years had the good fortune to enjoy an abundance of all of the factors named
above, which were also well suited to rapid economic growth. On the institutional front, the U.S. colonies had the
advantage of British institutions, which some consider to be the secret ingredient that made Britain the home of
the Industrial Revolution. After declaring independence in 1776, colonial leaders established what became the
world’s oldest liberal democracy, based on a practical and flexible constitution and the same strong defense of
property rights that protected innovation and investment in Great Britain. In succeeding years, the government
encouraged settlers to move west to occupy and develop lands that were sparsely populated by native American
tribes, with a system of small land grants that created a large middle class of landed farmers. This invasion of the
territory where native Americans previously lived not only promoted movement of labor and settlement of the
interior regions by European settlers, but also generated a middle class of European descendants who supported
democracy and the protection of free markets and individual property rights for themselves, which a landed
minority elite might have opposed. The United States also enjoyed the unique advantage over its European
counterparts of having no landed, feudal class or aristocracy to stand in the way of development.

Unfortunately property rights were not extended to the native Americans, called Indians since Christopher
Columbus´ arrival to Latin America. Europeans and Americans in the young United States fought the native
Americans for their abundant, fertile land, eventually setting aside less valuable land for reservations where some
descendants of the Indians who did not integrate into the new society still live. The largely nomadic native North
American population was much smaller than in the more densely populated Central and South America, possibly
due to the ravages of European diseases brought up from Spanish America before the first English settlers
arrived in the 1600s. Some historians believe the native population may have been decimated from levels of
about 300,000 to probably less than 100,000 by 1776. One scholar, for instance (Crosby, The Colombian
Exchange: Ecological Imperialism), believes that there was a “holocaust” among the native American population
following the arrival of Columbus and European traders in the 1500s which could have reduced the population of
Mezzo-America from 25 million to about 1 million. More recently, Jared Diamond summarized current research by
saying, “Throughout the Americas, diseases introduced with Europeans spread from tribe to tribe far in advance
of the Europeans themselves, killing an estimated 95% of the pre-Columbian Native American population.”2Nor
were property rights extended to the enslaved Africans, who were deprived even of the rights to their own lives
until after the 1861-1865 Civil War.

On the institutional front, some economic historians have stressed the contrast between the so-called "neo-
Europe" colonies, like the United States, and other “extractive” colonies. In the “neo-Europes”, colonists created
representative, "inclusive" institutions that defended what the European settlers wanted, which was political and
economic freedom for themselves. In “extractive” states, in contrast, the objective was to rapidly transfer
resources from the colony to the home country, which meant that institutions tended to be more authoritarian,
forced labor was often employed3, and incentives to invest in institutions or infrastructure were reduced.4 As
Nobel laureate economist Douglass North has noted, “Countries with better institutions, more secure property
rights, and less distortionary policies will invest more in physical and human capital, and will use these factors
more efficiently to achieve a greater level of income.”5 The combination of strong incentives for private
investment, property-friendly institutions for the new colonists and a minimal government (see Figure 4 below)
accelerated development in the colonial United States and have sustained it over time.

In the wake of the 2021 Capitol insurrection, led by ultra-right supporters of outgoing U.S. president Donald Trump, Acemoglu and
Robinson re-evaluated their view of American institutions. "U.S. institutions are really coming apart at the seams — and we have an
amazingly difficult task of rebuilding them ahead of us," Acemoglu said. "This is a perilous time." Hear or read more at this podcast.
(https://www.npr.org/sections/money/2021/01/19/957240511/why-nations-fail-america-edition?t=1615466315336)

Labor, arguably the key factor of production for an economy, was also abundant and cheap in the young United
States thanks to massive inflows of immigrants, first from Britain and northern Europe, later from southern and
eastern Europe, and finally from other areas of the world, particularly Latin America and Asia. The United States
received more than 33 million immigrants between 1820 and 1920; and by 1910, 40% of the population was
either foreign-born or had one foreign-born parent6. These heavy flows have continued, with millions of
immigrants entering the country legally and illegally every year. They have represented 13-14% of the population
almost every year in the 21st century (see figure below), which is high in the international context. Generally the
immigrants have been young, willing to take risks and eager to work. The education levels of Americans and
immigrants have also been relatively high compared to other countries. Schooling was a high priority in the
young United States, raising the quality of the labor force and increasing the country´s stock of human capital
(see second figure below)8.

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Education And Literacy In The United States And Selected Countries, 1850

Country Adult literacy around 1850 Primary school enrollment per 10,000, 1850

Sweden 90% n.a.

United States 85-90% 1,800

Scotland 80% 1,045

Germany 80% 1,600

England and Wales 67-70% 1,045

France 55-60% 930

Austria (excluding Hungary) 55-60% n.a.

Belgium 55-60% n.a.

Italy 20-25% 463

Spain 25% 663

Russia 5-10%
98

In the southern states, labor included the work of African slaves, from colonial times through their official
emancipation in 1863. About 661,000 Africans were brought to the United States to work the large and lucrative
cotton and tobacco plantations in the south, before Congress banned further imports in 1808. Although this
figure represents only about 7% of the European slave trade with the colonies in North and South America and
the Caribbean, the higher survival rate of U.S. slaves9 made the United States the home of about 36% of all
slaves in the western hemisphere by 1825. By 1860 African slaves represented more than half of the population
of the southern states.10 These states specialized in farming crops for export and lagged behind the
industrialization process in the rest of the country, perhaps because of their reliance on slavery. Opposition to the
institution of slavery outside the south led to a devastating Civil War starting in 186111 that abolished it
everywhere in the United States.12 However, a system of virtual apartheid persisted in the south, and the intense
racism prevalent there spilled over once the “Great Migration” of more than 6 million African Americans to
northern states began in 1917. Its worst manifestations were legally eradicated after the civil rights movements of
the 1960s, and integration was promoted with measures such as school busing and a quota system known as
Affirmative Action. Lingering racist practices and attitudes persist, however, especially in the south.

For capital and technology, the United States also benefited from its close links to the world industrial and
technological leader, Great Britain, which invested heavily in the new country and whose technological
innovations drove its initial phases of growth. The landed middle class and a nascent industrial class also
invested in rising industries such as textiles, steel and mining, and in the railroads and canals that linked the
country by the middle of the 19th century and permitted development to expand.

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Land ownership in traditional European societies was often tied to political or military prestige or wealth and
privilege. In the United States, however, it became a commodity for exchange and sale. In 1790, it took 57.1
man-weeks of labor to purchase an acre of land in Great Britain, compared to 1.1 weeks in the United States; in
1860, the figures were 60.6 man-weeks in Britain and 2.9 in the United States7.

In resources, the United States benefited not only from a temperate climate and cheap land in an abundance not
known in Europe, but also from large deposits of many important resources. The United States became the world
´s leading mineral economy at the same time that it became a global leader in manufacturing (1890-1910), and by
1913 it was the top producer of nearly all major industrial minerals, as shown in the figure below13. This attracted
heavy investment into new resource technologies, and made U.S. industry intensive in the use of resources that
were abundant domestically. This is best illustrated by petroleum, where the United States dominated world
production for more than a century, then returned as the world’s top producer after the shale revolution of the
21st century. The petroleum-intensive nature of U.S. industry can be a handicap, however, and galvanize
resistance to the measures needed to combat climate change.14

US Share of World Totals, Several Basic Minerals (1913, 1989)

Resource 1913 output (as % world 1989 reserves as (%world

output) reserves) 1989 reserves plus
cumulative
1913-1989 production (%
world)

Petroleum 65 3.0 19.8

Copper 56 16.4 19.9

Phosphate 43 9.8 36.3

Coal 39 23.0 23.3

Bauxite 37 0.2 0.5

Zinc 37 13.9 14.0

Iron ore 36 10.5 11.6

Lead 34 15.7 18.1

Gold 20 11.5 8.6

Silver 30 11.7 16.3

Thus in the young United States there were few or no barriers to rapid economic growth. Two additional factors
stimulated development: large, relatively prosperous and well connected domestic markets, and freedom from
external military threats throughout the 19th century (except brief wars with Great Britain and Mexico).15 As a
result, the United States developed steadily throughout the 19th century, with per capita income growing by
around 1.5% a year. By 1913 it had passed the United Kingdom in GDP per capita and productivity levels, and
established its global industrial leadership. By the 1920s it had already begun the transition to a service-based
economy.

In the early 21st century, the United States and its economy were diverse and dynamic. On the population side,
continuing immigration at levels near those of the 19th century had made the United States steadily more diverse,
moving from predominantly white and British to a racially and ethnically varied country (see first figure below).
Immigrants give it higher birth rates, demographic growth, higher potential GDP growth and a relatively young
population (see second figure below), which alleviates some of the pressures that ageing has placed on growth
rates and pension systems in Europe and Japan, and even in emerging economies like China. The United States
has been more successful than most countries at incorporating immigrants into society and engaging them in the
work ethic and the drive for success, as the third and fourth figures below indicate16. The proportion of
immigrants who are highly skilled --many of them lured by jobs in the dynamic high-tech and health sectors-- is
higher than in any other nation, adding to the country’s human capital. Additionally, U.S. citizens and immigrants
are extraordinarily mobile, lending extra flexibility to the nation’s labor markets. Possibly due to its past and
present as a “melting pot” of diverse peoples, feelings toward foreigners have been less negative in the United
States even as populism has risen, while the sense of national identity is stronger than in many other developed
nations (see last figure below).

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Among the drawbacks suffered by immigrant nations is that they seem to be more prone to violence due to racial and
ethnic clashes, and they often lack a cultural identity to hold their diverse populations together. Some analysts doubt that
the United States can remain a cohesive democracy as the influx of foreigners grows ever larger17. Large immigrant flows
also aggravate US income inequality, which is already higher than other developed countries and rising. Although mobility
from lower to upper income brackets is high, it has declined18, and as specialization in high-tech, human capital-intensive
industries continues, the income gap between workers with college degrees and those without is rising (it has doubled
since 1979). This, along with the concentration of immigrants in low-wage industries suffering from foreign competition,
could put pressure on the consensus of such diverse groups over the U.S. model, and fuel social conflict in the future.

1 Amartya Sen, 1999, Development as Freedom Alfred A. Knopf.

2 “Westward expansion and public land policy”, by Jeremy Atack and Peter Passell, A New Economic View of
American History, 2nd edition, W.W. Norton & Company (New York), 1994. Jared Diamond, Guns, Germs, and Steel:
The Fates of Human Societies, W.W. Norton & Company, New York 1999.

3 Forced labor in Latin America lasted until 1910 in Mexico, 1945 in Guatemala; slavery in Brazil until 1886. Daron
Acemoglu, Simon Johnson and James A. Robinson, The Colonial Origins of Comparative Development: An Empirical
Investigation, NBER Working Paper 7771 (http://www.nber.org/papers/w7771 (http://www.nber.org/papers/w7771)).
For a more complete discussion and an analysis of many historical examples, see Acemoglu and Robinson, Why
Nations Fail, 2012, Crown Publishing Group.

4 Daron Acemoglu, Simon Johnson and James A. Robinson, The Colonial Origins of Comparative Development: An
Empirical Investigation, NBER Working Paper 7771 (http://www.nber.org/papers/w7771
(http://www.nber.org/papers/w7771)). For a more complete discussion and an analysis of many historical examples,
see Acemoglu and Robinson, Why Nations Fail, 2012, Crown Publishing Group.

5 North and Thomas, 1976, The Rise of the Western World: A New Economic History.

6 There were no official barriers to immigration to the United States until 1917.

7 For a fascinating accounting of wages and prices in the United States in the 19th century, see
https://libraryguides.missouri.edu/pricesandwages/1860-1869.

8 Calculated from Carlo M. Cipolla, Literacy and Development in the West (Harmondsworth, 1969), and Richard E.
Easterlin, “Why Isn´t the Whole World Developed?”, Journal of Economic History, 41 (March 1981).

9 The life expectancy at birth for an American slave in 1850 was 36 years, compared to 40 years for the white U.S.
population. However, life expectancy at or around the same time was lower in many European states: 31 years in
Austria (1875), 35 years in Italy (1885), 36 years in France (1854-58) and 36 years in the Netherlands (1850-59). See
Robert W. Fogel and Stanley L. Engerman, Time on the Cross: The Economics of American Negro Slavery, (Boston:
Little, Brown, 1974): 125, Figure 36.

10 See “Slavery and Southern Development”, Jeremy Atack and Peter Passell, A New Economic View of American
History, W.W. Norton and company, 1994. Brazil, for instance, imported six times as many slaves as the United
States, but had only 31% of the total slave population in the western hemisphere, due to higher death rates and lower
fertility rates.

11 The civil war took 600,000 lives out of a U.S. population of 32M, compared to 400,000 out of 140m in WW2. The
financial cost of the civil war was also high: the government could have purchased all slaves and given each slave
family a mule and 40 acres for what the war cost.

12 Economic historians do not agree on whether slavery was an obsolete institution that would have died out on its
own given a few years; or whether it was profitable and would have continued in the South without the Civil War. See
Atack and Passell (cited above) for a discussion.

13 Source: Gavin and Czelusa, 2003.

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14 For a discussion of this issue, see Mineral Resources and Economic Development, Gavin Wright and Jesse
Czelusta, Stanford University, October 2003 (Paper prepared for the Conference on Sector Reform in Latin America).

15 In the 18th and 19th centuries, Great Britain and France spent 15-20% of their GDP in different periods on wars.

16 Most experts agree that Europe is much less successful at integrating its migrant population. For an early
discussion of this issue, see Francis Fukuyama, summarized in “U.S. model for Europe: Immigrant work ethic”,
International Herald Tribune, December 6, 2005, p. 2.

17 For one discussion of this problem, see Samuel Huntington, Who Are We? The Challenges to National Identity,
2004.

18 Katharine Bradbury and Jane Katz for the Federal Reserve Bank of Boston found that in the 1970s, 65% of people
changed their social position (that is, moved out of the income bracket in which they had started the decade). In the
1990s, only 60% did. Study cited in The Economist, July 14, 2005.

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