Tuesday, July 8, 2014

Book Review: Global Economic History: A Very Short Introduction by Robert C. Allen

"Economic history is the queen of the social sciences" is how Robert C. Allen opens his contribution to Oxford's pithy Very Short Introduction line of pamphlets.  His Global Economic History: A Very Short Introduction provides an informative bird's-eye view of economic development over the past five hundred years.

Allen divides modern economic history into three periods: a mercantilist period from 1500 to the Industrial Revolution in the start of the 19th century; a catch-up period in which "Western Europe and the USA made economic development a priority and tried to achieve it with a standard set of four policies: creation of a unified national market by eliminating internal tariffs and building transportation infrastructure; the erection of an external tariff to protect their industries from British competition; the chartering of banks to stabilize the currency and finance industrial investment; and the establishment of mass education to upgrade the labor force;" (2) and finally a period of Big Push investment.

Allen notes that "Between 1820 and the present, the income gaps have expanded with only a few exceptions." (3)  The exceptions are Japan and the East Asian Tigers, with the Soviet Union as a less complete success and China still in the process today. (6)

"Why has the world become increasingly unequal?" (14) Allen asks.  He contends geography (location of natural resources, lack of tropical disease, ease of transportation) matters, but is rarely the whole story.  Cultural explanations that evoke work ethic such as Weber's are "no longer tenable." (14)  Literacy and numeracy are certainly important, but it is controversial whether and how political and legal institutions are as well.  He concludes that "technological change, globalization and economic policy turn out to have been the immediate causes of unequal development." (16)  The great divergence began with the "first phase of globalization," beginning with the voyages of Columbus, Magellan et al.  Literacy developed in this period as a result of the commercial economy, not as a result of the Reformation. (26)

The next question Allen tackles is why the Industrial Revolution happened in England.
While noting England had a "favorable political system" and an "emerging scientific culture," (29) ultimately the fact that Britain had a unique situation where "labor was expensive and capital was cheap" ensured the Industrial Revolution was British. (33)  Incremental developments in textile production (which Allen points out "owed nothing to scientific discoveries" (33)) and the invention and subsequent refining of the steam engine were important innovations.

Following the emergence of the Industrial Revolution in England, rapid economic development spread to Continental Europe.  Mainland Europe may have lagged behind Britain because of archaic institutions (swept away by the French Revolution and Napoleonic Wars, but only after Waterloo could Europe take advantage of this) or the disadvantages of playing catch-up or a labor/capital price structure unlike that of England. (40-41) Allen notes the striking contrast in this period between "the rich countries, who, as a group, pushed technology forward, and the rest of the world, which seemingly made no innovations at all." (46)  He continues: "The obvious question is why [low income countries] do not adopt the technology of the Western countries and become rich themselves.  The answer is that it would not pay... The Western countries have experienced a development trajectory in which higher wages led to the invention of labor-saving technology, whose use drove up the labor productivity and wages with it.  The cycle repeats.  Today's poor countries missed the elevator." (51)  And later, in the context of textiles: "Comparative advantage implies that the unbalanced productivity growth of the Industrial Revolution should have furthered industrial development in England, while de-industrializing India.  And that is what happened." (57)  "The story of Indian textiles was the story of much of the Third World in the 19th century." (61)

Allen then devotes two chapters to the Americas and Africa, respectively.  After a discussion of the Staples thesis, Allen states that, in terms of economic development, "The major difference between the USA and Latin America was the share of the population that was socially excluded," with Latin America excluding a much larger share of its population (natives and blacks were around two thirds of total population in Latin America, in contrast to one seventh in the US). (89)  In the case of Africa, it lacked advanced agrarian civilization in 1500, so it was in no position to have an industrial revolution. (92)  Today, "The reason that Africans are poor is because the continent's agriculture generates a First World War standard of living." (109)  The next chapter examines the failure of the standard model of economic development in Russia, Japan and Latin America.

Regarding Big Push development, Allen remarks, "The only way large countries have been able to grow so fast is by constructing all of the elements of an advanced economy -- steel mills, power plants, vehicle factories, cities, and so on -- simultaneously.  This is Big Push industrialization." (131)  The USSR provided what looked like a model for a poor country to develop before the growth rate started declining in the 1970s.  Japan "grew rapidly by closing three gaps with the West -- in capital per worker, education per worker, and productivity." (139)  Mass schooling closed the education gap, and state-led industrialization closed the other two.  The chapter ends with a discussion of China.

In the Epilogue, Allen contrasts the success of East Asian development with the failures of Latin American development: "These countries have avoided the inefficiencies that Latin America has endured in trying to shoe-horn modern technology into small economies either because they were so large that they could absorb the output of efficient facilities or because the were given access to the American market at the expense of American production." (147)  Allen ends on an ambivalent note: "Which of the many initiatives followed by these countries was the most effective, however, remains the subject of a great deal of debate.  Also, it is not so clear whether the successful policies can be transplanted to other countries.  The best policy to effect economic development, therefore, remains very much in dispute." (147)

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