Geography, culture, institutions and economic growth

Acemoglu, Johnson and Robinson (p. 406) used a very effective visual aid to show that institutions and not culture of geography are the main or fundamental determinants of economic growth. A version of the graph using Maddison's data is shown below.

The graph does show that even though South and North Korea share the same culture and geographic conditions, they do have significantly different growth patterns after the 1970s, with GDP per capita in South Korea reaching more than US$20,000 by 2008, while North Korea never takes off, and after the collapse of the Soviet block reverts to the initial levels. This would suggest that institutions are central for growth.

There is the whole issue of which institutions are relevant, of course. Acemoglu et al. emphasize private property rights and the rule of law, which would allow entrepreneurs to invest. In their view, supply side factors are central. I would argue that demand forces are more relevant, and that symbiotic relation with US has played a role in South Korean success, in particular in lifting the balance of payments constraint that is the major hurdle for developing countries. At any rate, the figure below is meant to put the notion of South Korean success in perspective.

Note that both Koreas are unified in the graph (again using Maddison's data). Chile is a good comparison in Latin America in terms of GDP per capita. Yes Korea, both of them, were catching up in the 1950s and 60s, but from the mid-1980s onwards, all the growth of South Korea means that they keep the pace with Chile.

I am certainly not suggesting that the Chilean model, which relies on the export of commodities (fundamentally copper), which the neoliberals never privatized after Allende's nationalization by the way, and strict integration to world markets with Free Trade Agreements (FTA) with the US and everybody else, is a good strategy. Yet, the alternative of diving your country in two and becoming a satellite of the dominant hegemon at best makes you a middle income country. And of course is not open to all.

US and China's total GDP in PPP

Branko Milanovic shows (using Maddison data) that:

According to Maddison's data, #US was the largest economy from 1870 to 2010. #China was the largest before and after. pic.twitter.com/hu3g2p7Wuy
— Branko Milanovic (@BrankoMilan) July 7, 2013

Graph below:

Note that in terms of per capita GDP China is still a relatively poor country, given differences in population size. However, from a macro point of view, Chinese demand now plays an important role in the world economy.

Reversal of fortune and settlement colonies

Acemoglu and others have discussed the concept of reversal of fortune, the idea that the areas with high income per capita around the 1500s (basically the areas colonized by Europeans in the Americas and Asia) became relatively poor, and vice versa. The idea is that there is a negative relationship between economic prosperity in 1500 and income per capita today. They suggest that the type of settlement and the institutions built by colonizers explain the apparent paradox.

The idea is that in settlement colonies, were more equalitarian societies were built, institutions protected property rights and led to higher investment and growth (à la North). They use the mortality rates associated to a particular region as an instrument for the type of settlement and institutions built by European colonizers. High mortality rates imply low European population density, more indigenous or African slaves, and more unequal institutions, with less protection of property rights.

It is a clever argument, no doubt (put forward by Engerman and Sokoloff, in fact), and more importantly a creative use of the notion of settlement colonies.* I have several problems with it, nonetheless. It is far from clear that equality is really connected to growth, and that causality runs from Western type property rights to growth, rather than vice-versa. I tend to spend quite a bit of time on this in my Latin American History classes. There are also significant problems with Engerman and Sokoloff's notion that institutions responded to factor endowments [fundamentally the idea that in capital-abundant/labor-scarce societies, wages were high leading to technological development; yes the capital debates again, but I'll leave this for another time].

Recently I found the graph below in Angus Maddison's Contours of the World Economy 1-2030 AD: Essays in Macro-Economic History.

The graph shows that Southern Europe, North Africa, and the Eastern Mediterranean were the high income regions, while Northern Europe was relatively poor. In this case, in fact, disease is not a good guide for the type of institutions built in the different regions. Other than the Italian Peninsula, it is the Nile Valley, i.e. Egypt, that had the highest income per capita during the Roman Empire. The Reversal of Fortune is also evident in this case, with France having a significantly higher income per capita than Egypt, for example. It is hard, however, to think that mortality rates associated to tropical diseases (with Southern Europe and North Africa closer to the Tropics) would have something to do with this particular reversal of fortune.

It was the region of older agricultural settlement, more urbanized, more directly connected with Eastern trade, the Eastern Mediterranean part of the of the Empire that was more developed, and that survived for a longer period (until the Turkish conquest of Constantinople in 1453). The reasons for the reversal of fortune in this case, are connected to the rise of the Atlantic economy, related to the Great Discoveries, and the expansion of the African route to Asia. If you ask me, more relevant than the incentives provided by property rights in explaining the Portuguese (and then Dutch and British) search for the alternative routes to Asia, is the rising and changing patterns of demand in Western Europe (and success is based on the naval-military advantage, Guns and Sails, Cipolla would say). But for our purposes here it is only relevant to note that mortality rates no longer seem a relevant instrument for the types of institutions.

* Moses Finley suggests that the idea of settlement versus exploitation colonies (note that Acemoglu et al., avoid the use of the term colonies of exploitation referring only to the settlement ones) was originally developed by Wilhelm Roscher of the German Historical School and later by Paul Leroy-Beaulieu, a liberal (in the European sense of the word) French economist.

Manufacturing matters

It does for sure. But the graph below just shows the varying share of manufacturing since the mid-18th century (source is Robert Allen, 2011). And I don't intend to say much on whay it matters per se, but note that global economic dominance goes hand in hand with manufacturing.

Note that the West, narrowly defined as England the rest of Western Europe, what was to become the US and Russia (called for the whole period USSR) had a share of less than 20% in 1750, it had expanded to more than 80% on the eve of WW-I. If you add Australia, Canada and Latin America (which are all in Rest of the World, but are what Maddison would call Western offshoots), the numbers are even larger. Most of the changes were associated to the squeeze of China. And most of the recent changes are associated with expansion of China and East Asia (which includes Japan). We have not gone full circle, by the way.

In other words, the process of development (or indutrialization in the center) went hand in hand with the process of underdevelopment (deindustrialization) in the periphery, and old lesson from a little book by Osvaldo Sunkel which is still worth reading.

China and Latin America

Back in the late 1960s and early 1970s the topic in economic development was the so-called Brazilian Miracle. Rates of growth were a staggering 7.5% on average, and in the last phase of the boom were in the two digit level. Forty years later the Brazilian economy is far from that kind of performance. Only the Chinese can boast such a miracle (at least so far). The graph below shows the relative performance of China with respect to both Argentina and Brazil from the 1950s until 2009.

The chart shows that until 1980 Brazil income per capita grew slightly faster than China, while Argentina did basically at the same rate, and both Latin American countries were considerably wealthier than China. By 2007 China's income per capita had surpassed that of Brazil and was approaching fast that of Argentina. Also, it is clear that in the 2000s the comparative performance of Argentina was better than that of Brazil.

These measures are with Geary-Khamis Purchasing Power Parity (PPP) 1990 dollars, which should be taken with some skepticism. From our perspective the important thing is that the data provides a good picture of the relative growth of China, even if the absolute level (whether the average Chinese is better off than the average Brazilian) might be less than precise. The source is from Fundación Norte y Sur, headed by Orlando Ferreres , but the original data (my guess is that with the exception of Argentina for the last few years) is from Angus Maddison.

I'll have more on the problems of PPP measures in a different post.