Short Reflection Essay on Module 6 This is an open book/open note reflection paper, which will be


Short Reflection Essay on Module 6

This is an open book/open note reflection paper, which will be uploaded to Canvas. It will be based on the lectures, presentations and readings. The students will answer the following question, not exceeding 2000 words.

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900 words or more

What were the ingredients for success /or failure in the region or sub-region or a country discussed in the Module? What were the economic growth promoting institutions? How did they affect the economic growth / Or what institutions were lacking that constrained the region/sub-region/country from developing?

please focus in just one country or region.

The assignment is based on 25 points shown on the rubric, if you receive 17 or above, the assignment is “complete”, below 17 is “incomplete”. 

iddle East

iddle East

site of the w
orld’s earliest

civilizations and the
birthplace of three great


Christianity, &

area com

ountains,deserts, fertile

plains irrigated by grand
rivers, and


atically, the M

iddle East
ranges from

the tem

editerranean coast, to the


heatof the

desertareas, to snow


Countries in the M
iddle East

Bahrain, Cyprus, Egypt, Iran, Iraq, Israel, Jordan,

ait, Lebanon, O

an, Palestine, Q
atar, Saudi

Arabia, the Syrian Arab Republic, Turkey, the U

Arab Em
irates &


Trade routes

Trade routes betw

een m
edieval Europe and A

sia passed through the M
iddle East >

earned m
onopoly profits from

the trade of A
sian spices and luxury goods w

ith Europe

In the early m

odern period these m
onopoly profits flow

ed first to the pockets of
Portuguese, and then D

utch, and finally to the British and French


edieval plague &

ongol invasion hit the M
iddle Eastern econom


Caravan trade


ain caravan routes w
ithin the O

an Em

pire (route w
ent East -W

est in southern and
northern A

natolia), connected Syria and M

ia, and from
there led to Persia-

Central A
sia and in som

e periods even to China.

Bedouin tribes required dues that could be as large as three tim

es the norm
al transport


Trade goods com

prised textiles and spices from
India and South A

sia in exchange for
European m

anufactures, A
frican ivory, silk, ostrich feathers and sim

ilar item

Black slaves from

frica w

ere traded northw
ard, and w

hite slaves from
Russia and

Balkans w
ere traded Southw


Industrial production

In contrast to w

estern Europe, w
here pro-industrial production w

as in the countryside,
industrial production in the M

iddle East w
as m

ostly concentrated in the cities

Textile production w

as the m
ost im

portant industry, com

ented by the food
processing, furniture and specialized industries


ilitary interest of the O

an Em
pire > Turkish arm

ent producers and ship builders

could produce goods at sim
ilar levels of quality those produced by Europeans

ation of Em


During the m

edieval period, the technology of the

iddle East w
as superior to that of Europe &


as flow

ing from
the form

er to latter including m

ledge> but in 18

thc things reversed →

Eastern governm

ents and fam
ilies underinvested in



an Em

pire m
assively extended in the 15


ard the Balkan and South-Eastern Europe, in 16

ards East and N

orth Africa

During the 19
thcentury, the O

an Em

pire gradually
decreased its influence and becam

e the “sick m
an of

Europe” →
the countries both in Europe and M

East began to fight for independence > M

iddle East

e the object of colonial influences from

European pow


deindustrialization in M
iddle East


uring the 18

c, the O

an Em
pire w

as com
pletely self sufficient in textile products &

exported carpet, silk and textiles.


Cotton prices increased substantially> change in term
s of trade tem

pted the M

East to specialize in this area of production. →

hen the term
s of trade for these goods

declined again during the 1930s, there already w
as a degree of path-dependence, w

kept m

iddle eastern econom
ies in the cash-crop.

hy deindustrialization?

Favorable developm
ent of export prices for M

iddle Eastern cash crops like cotton lured
the region into deindustrialization. Other m

ain factors:

institutional developm

ents related w
ith industrialization interacted w

ith traditional

s of the region (interest-credit)


an capital and skills w
ere lacking for industrialization


pening of the O

an econom
y to im


The system
of production and taxation did not encourage developm

5. D

uring the tw
entieth century, oil revenue becam

e im
portant > after that the

ic history of the region becam

e a struggle for oil

inorities in Trade &



e m
inorities w

ere considered to be predeterm
ined for trade and finance in the


an Em
pire> G

reeks, Jew
s, A

enians, Christian A

rabs becam
e active in trade sector

and finance…
.. G

alata bankers dom
inated O

an financial developm

.. A


and G
reeks w

ere also active in internal trade, industry, Crafts and professions…

otivation of talented A

rab, Iranian and Turkish m
ajorities to invest in trading skills

developed late, partly because the m
inorities had a low

social reputation in their eyes and

itating their profession w
as not desirable.

Reindustrialization attem

Skyes-Picot Agreem

ent in 1916 divided a part of M
iddle Eastern region –

hich w

as previously
part of O

an Em

een England (Palestine, Iraq, Jordan) and France (Syria, Lebanon).


er O

an territory of Palestine becam
e a British m

andate in 1920 &
1922, the League of

ations decided that in this territory, a ‘national hom

e’ for Jew
s should be established…


strong im

igration of Jew

. Their population share rose from

in 1919 to 32%

in 1947. Given
that the British M

andate aim
ed at restricting land purchases of previously Arab-ow

ned land by

ish im

igrants, the Jew
ish population group w

as initially m
ore urban and had a higher share in

industrial occupations than the Arab m

Deficit in Education
1. Governm

ents spend little public funds on education. Extrem
e w

as Yem
en, w

children received alm

ost no schooling


level of num
eracy and school education m

ade it very difficult to develop a class of

function of entrepreneurs w
as, therefore, taken over by the state.

Another reason w

as the am
ount of oil revenues> in 1908, oil w

as discovered in the

iddle East…
.. changed the landscape of its econom


p to 1940, M
iddle Eastern

and north A
frican oil production w

as still below

of w
orld production…

. Then
exploded to 26 %

in 1960, reaching a m

of 42%

in 1975.

Iranian governm
ent decided to give a concession to a British com

pany. O
ther countries

also gave concession to European and A

erican firm

Present Econom
y of the Region


of the

iddle East

is very diverse, w
ith nationaleconom

ranging from

exporting rentiers to centralized econom

ies &




griculture: although only about 15%
of the

is suitable for farm

ing, agriculture

ains the
region’s m

ost im
portant econom

ic activity.

poorest country in this region is A

fghanistan, w
hich alw

ays had a very low
education &



(Organization of Petroleum
Exporting Countries)O

’s cartel policy during the A

conflict of 1973 &

later in the 1970s generated a flood of revenues for the oil states, Iran, Iraq, Kuw

Saudi A
rabia, Q

atar, U
nited A

rab Em
irates, Egypt, Libya, A

lgeria, Bahrain and O


Gulf Cooperation

Bahrain, Kuw
ait, O


atar, Saudi Arabia &


nited Arab Em

Established in 1981

Free services


ealth Services


Study abroad

Services Subsidized ( electricity, w

ater and fuel)


o tax

Oil prices falling


fficial Nam

e: Islam
ic Republic of Iran (1935)

Capital: Tehran


fficial Language: Farsi

Capital: Tehran

Persian, Azeri,Kurdish, Lur, Baloch, Arab, Turkm
en and Turkic tribes

Iran is divided into five regions w

ith thirty-one provinces. The five

inistrative regions are Tehran, Isfahan, Tabriz, Kerm
anshah &




(official) 99.4%
(Shia 90-95%

, Sunni 5-10%
), other (includes


Christian) 0.3%

, unspecified 0.4%
(2011 est.)

Iran is a founding m

ber of the UN, ECO, O

rganization of

ic Cooperation), and O




The British discovered large oil reserves in Iran and form

the Anglo Persian oil com


Reza Shah Pahlavi seized control of the country and began to

odernize it


Iran rem
ained neutral during W

II but Reza Shah leaned in

pathy tow

ards Germ
any. By 1940, nearly half of all

Iranian im
ports cam

e from

any and 42%
of all Iranian

exports w
ent there. leading to occupation by the British and

the Soviets forcing Reza Shah Pahlavi out of pow
er leaving

his son M

ad Reza Shah Pahlavi to succeed the throne.



ed M

osaddeq attem
pted to nationalize the British-

ned oil industry. The shah opposed and rem

oved him


er, but M
osaddeq regained pow

er and forced the
shah to flee Iran.



1953-The shah returned to Iran w
hen the CIA helped



ad M


1963-The shah im

ented “The W
hite Revolution”

an aggressive cam
paign of social and econom


esternization that w
as m

et w
ith a lot of opposition


.1978-Iranians begin rioting to protest the shah’s
authoritarian rule. In response, he enforced m

artial law


Shah fled Iran w
hile Ayatollah Khom

eini returned from

France, w
here he w

as exiled

ber 4

th Islam
ic students storm

ed the U.S.

bassy in Tehran, taking 52 Am
ericans hostage and

anded that the shah return from

receiving m

ent in the U

S to face trial in Iran



A United States backed Iraq
invaded Iran starting a w

ar that
lasts 8 years over territory.


Ayatollah Khom
eini died and Ali

enei becom

es successor as
the new

national religious


The United States placed oil and
trade sanctions on Iran, accusing
the country of sponsoring

, com

itting hum

rights abuses, etc.


The United States announces

ic sanctions against

Iran targeted to im
pact the

country’s m
ilitary and nuclear



Iran adm
its that it’s building a


ent plant but
insists it is for peaceful purposes


UN Security Council im

fourth round of sanctions
against Iran over its nuclear




orld pow

ers reach a deal w
ith Iran on lim

iting Iranian
nuclear activity in return for lifting of econom

ic sanctions and
the return of 150 billion dollars of frozen funds.


President Trum
p announces the US w

al from

2015 international deal on Iran’s nuclear program

. Iran w

that it w
ill begin increasing its uranium

ent capacity

if the deal collapses as a result of the US m


Biden adm
inistration, a new

deal w
ould have to be linked to

restraints on Iran’s m
issile abilities and its support for

terrorist groups, as w
ell as on its aid to the Syrian



































































eline of Israel’s History from


1948-1949:Israel declares independence. First A

rab-Israeli w
ar takes place. Thousands

of Palestinians fled or w
ere driven from

their hom
es (around 750,000). A


ents leave Israel w

it m
ore land. Jordan annexes W

est Bank and eastern

. Egypt occupies G


ately one m

illion Jew
ish refugees and 250,000 H

survivors settle in Israel.

1948-1977:Center-left dom

inates coalition governm
ents. Prom

otes a self-sufficient,
agrarian and secular Jew

ish dem
ocracy w

ith a non-aligned foreign policy.

1956-1957: Israel partners w

ith Britain and France to invade Egypt in order to reopen
the Suez canal to Israeli shipping and end arm

ed incursions by Palestinians from

Israeli shipping allow
ed due to U

buffer force set up in Sinai and G


eline (cont.)

1967: Six-day w

Israel launches pre-em

ptive attack on Egypt w
ith Jordan and Syria joining the

ar w

hich lasts six days.

1977: Cam

p David Accord–

ar Sadat, Egyptian president, visits Jerusalem
and begins talks to

have Israel w

Sinai and include Israel in the accords of 1978. Accords have Israel

expand Palestinian self-governm
ent in W

est Bank/Gaza.

1982: Israel invades Lebanon to expel PLO
leadership. M

assacre of Palestinians by Christian
phalangist allies w

here defense m
inister, Ariel Sharon, is held responsible. M

ass protests and anti-

ar m


1985:a team

of skilled econom
ists, led by M

ichael Bruno, put together an econom
ic stabilization

plan that w
ent into effect June 1985.

1993: Prim

e M
inister Rabin and PLO

leader Yasser Arafat sign O
slo Declaration

1995: Rabin is shot dead by Jew

ish extrem
ist. Shim

on Perez takes over.

eline (cont.)

2002: Operation Defensive Shield on W

est Bank is
launched by Israeli arm

y. Barrier in and around W

Bank starts being built. Palestinians see it as a tool to
grab land. (Ruled illegal in 2004)

2006:Second Lebanon w


2007: Annapolis conference establishes “tw


2009: Right-w

ing parties w
in elections. Benjam

Netanyahu form

s governm

2010: Relations w

ith Turkey w
orsen as som

e Turkish
activists are killed .

2011:Protests over cost of living and housing prices.

2016: Israel and Turkey begin talks to norm

alize relations

2016: U

S agrees to a m
ilitary aid package w

$38bn over the next 10 years


p recognizes Jerusalem

as capital of
Israel. He also recognizes Israeli sovereignty over the
Golan Heights (seize from

Syria in 1967 and then
annexed). Internationally, sovereignty is not

2019: Benjam

in N
etanyahu is charged w

ith bribery,
fraud, and breach of trust in three cases.

2020: Benjam

in N
etanyahu and Benny Gantz (centrist

alliance leader running in opposition) unite to tackle
the pandem

ic. UAE establishes diplom
atic relations

ith Israel.







S 2.84%


igh tech is m
ajor driver

of econom

Turkey (Turkiye)

In Turkey during the tim

e of M

al A

tatürk in the first half of 20


any reform
s w

ere initiated in different
fields such as politics, econom

ics and

.abolishing the sultanate &

caliphate system
converting the republic

of Turkey into a secular state.


Turkey has played a key role in Europe’s m

igrant crisis, having taken in m
ore than tw

o m

Syrian refugees, com
pared w

ith its ow
n population of around 80 m




ber since 1952, one of the biggest m

bers of the N


Istanbul is the largest city and industrial and com

ercial hub w

ith m
ore than 15 m

illion people.

Turkey w

itnessed m
ilitary coups in 1960, 1971 and 1980.

The Islam

ic-rooted Justice and Developm
ent Party (AKP) cam

e to pow
er in N

ber 2002. Its

leader Erdogan w
as prim

e m
inister from

2003 until 2014, w
hen he becam

e the first Turkish
president directly elected by the people.

Since 1984, the outlaw

ed Kurdistan W
orkers’ Party (PKK) has led an arm

ed rebellion in
the Kurdish-m

ajority southeast












Ancient Persia: From the Achaemenid Empire to the History of Iran




































Central ASIA

Central Asia in History

Region of old silk road

densely populated; urbanization rate was 15-20% during the late 19th c. →Urban centers such as Samarkand had a remarkably developed merchant culture

the region had experienced many different rulers , Mongols, Persians and Arabs. … cities had been conquered and sometimes destroyed….

Direct colonization took place in Central Asia, & the Caucasus→ Russia began a territorial expansion



Steppes, Deserts, & Threatened Lakes

Shrinking Aral Sea

Use of rivers feeding the sea for agricultural irrigation

60% of the sea’s total volume has disappeared

Caspian Sea – world’s largest lake; construction of reservoirs on the Volga River diverted water


The Gobi Desert

Kara Kum and Kyzyl Kum Deserts

Taklamakan Desert

Much of the region has been deforested

Globalization & Diversity: Rowntree, Lewis, Price, Wyckoff



Central Asian Highlands Formed by the collision of Indian subcontinent into Asian mainland → Himalayas, Karakoram Range, Pamir Mountains

Tibetan Plateau – source area of many of Asia’s large rivers

Steppe (grassland) and taiga (coniferous forest) in the north



Mongolian steppe (left) and the Gobi Desert after rain

Globalization & Diversity: Rowntree, Lewis, Price, Wyckoff


Densely Settled Oases amid Vacant Lands

Most of the region is sparsely inhabited

Too arid or too high in elevation to support human life

Pastoralists: people who raise livestock for subsistence

Highlands Population and Subsistence Patterns

Only sparse vegetation can survive in this region

Yak pastoralism

Sedentary farming in Tibet

Isolated valleys in Pamir Range support agriculture and intensive human settlement

Transhumance: seasonal movement of flocks from winter to summer pastures/meadows

Globalization & Diversity: Rowntree, Lewis, Price, Wyckoff


Milking a Yak in Mongolia

Globalization & Diversity: Rowntree, Lewis, Price, Wyckoff


Population and Settlement: Densely Settled Oases amid Vacant Lands

Astana, Kazakhstan

Globalization & Diversity: Rowntree, Lewis, Price, Wyckoff



Linguistic Geography of Central Asia (Fig. 10.13)

Globalization & Diversity: Rowntree, Lewis, Price, Wyckoff


Contemporary Linguistic and Ethnic Geography


In Sino-Tibetan Family

1.5 million speakers in Tibet and 3 million more in western China


5 million speakers

Other dialects: Buryat, Kalmyk

Turkish Languages

The most widely spoken language group in the region

Include Uygur, Kazak, Azeri, Uzbek, Turkmen, Kyrgyz

Globalization & Diversity: Rowntree, Lewis, Price, Wyckoff


Religions: iSLAM

Globalization & Diversity: Rowntree, Lewis, Price, Wyckoff



Buddhist (Temple in Tibet)

Globalization & Diversity: Rowntree, Lewis, Price, Wyckoff


Central Asia Under Communist Rule

Soviets inherited Russian Empire’s domain

Created a series of “union republics” (Kazakhstan, Uzbekistan, Turkmenistan, Kyrgyzstan, Tajikistan, Azerbaijan)→ sowed the seeds of nationalism, nation-states

After China reemerged as a unified country in 1949, it reclaimed most of its old Central Asian territories→ Movement into Xinjiang and Tibet (Xijiang)

Repression of Tibet & local opposition to Chinese rule

Border of China and India still contested

Chinese control of Xinjiang→ Uygur opposition→ Xinjiang has large mineral wealth and oil reserves & productive agriculture sector

Political Reawakening

Independence in Former Soviet Lands

It has been difficult for the 6 former Soviet Republics to become truly independent because cooperation with Russia on security issues necessary

Authoritarian leaders in these nations has made the transition to democracy more difficult

These countries have opted to remain part of the Commonwealth of Independent States

Ethnic strife in many of these countries

Globalization & Diversity: Rowntree, Lewis, Price, Wyckoff



War in Afghanistan before September 11, 2001

1978: Soviet-supported military “revolutionary council” seized power→ Marxist government began to suppress religion→ Russian invasion

U.S. and Saudi support rebels

Soviets withdrew in 1989

1995–1996 rise of the Taliban (Taliban founded by young Muslim religious students )

After September 11th balance of power shifted

U.S. launched a war against al-Qaeda and the Taliban government


Shanghai Cooperation Organisation (SCO) known as the Shanghai Pact

SCO Charter was signed on 7 July 2002 and entered into force on 19 September 2003. The SCO is the successor to the Shanghai Five, a mutual security agreement formed in between China, Russia, Kyrgyzstan & Tajikistan

transcontinental political economic, security alliance

world’s largest regional organization, covering approx. 40% of the world population, & more than 20% of global GDP

Its membership has since expanded to eight states, with India & Pakistan joining on 9 June 2017. Several countries are engaged as observers or partners. SCO members seem unwilling to extend membership to Iran, because that might disturb their relations with Western powers.


SCO: Powerhouse or Paper Tiger?

The SCO cannot be regarded as a military alliance as it does not oblige the members to collective defend and does not dispose of military forces.

For Russia it is also a forum for checking Chinese cooperation with the Central Asian states

For China, SCO legitimizes ties with the Central Asian states

For the Central Asian members, SCO gives them an equal voice with Russia and China as well as vetoing powers, while not preventing ties with the West.















Why are some parts of the world poor today, while others are rich? At which point in time did they diverge, and
what were the reasons? These core questions are addressed in a concise and accessible introduction to global
economic development since 1500. Leading economic historians from across the globe provide overviews of major
world regions together with global comparison chapters and case studies highlighting key themes, individuals,
processes and events. Utilising a set of common developmental indicators, the chapters address crucial issues such
as how international trade and migration, institutions and flows of physical and human capital impacted economic
growth. Richly illustrated with informative figures, maps, tables and charts, A History of the Global Economy
summarises the key economic findings, debates and ideas and provides students and the interested public with an
up-to-date and engaging introduction to the origins and evolution of today’s global economy.

JOERG BATEN is Professor of Economic History at the Department of Economics, University of Tübingen.


From 1500 to the Present
Edited by

Joerg Baten
University of Tübingen

In co-operation with the International Economic History Association

University Printing House, Cambridge CB2 8BS, United Kingdom

Cambridge University Press is part of the University of Cambridge.

It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning and research at the highest international
levels of excellence.

Information on this title:

© Cambridge University Press 2016

This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of
any part may take place without the written permission of Cambridge University Press.

First published 2016

Printed in the United Kingdom by TJ International Ltd, Padstow, Cornwall

A catalogue record for this publication is available from the British Library

Library of Congress Cataloguing in Publication data

A history of the global economy : from 1500 to the present / edited by Joerg Baten.

pages cm

“In co-operation with the International Economic History Association.”

Includes index.

ISBN 978-1-107-10470-9 (hardback) – ISBN 978-1-107-50718-0 (paperback)

1. Economic history. 2. Economic development – History. I. Baten, Joerg, editor.

II. International Economic History Association, sponsoring body.

HC51.H596 2016

330.9′03–dc23 2015026750

ISBN 978-1-107-10470-9 Hardback

ISBN 978-1-107-50718-0 Paperback

Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in
this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

List of figures
List of maps
List of tables
List of contributors

Introduction: a history of the global economy – the ‘why’ and the ‘how’

1 North-western Europe

I1 The great divergence in the world economy: long-run trends of real income

H1.1 International financial regulation and supervision

2 Southern, eastern and central Europe

I2 The Sputnik shock, the Pisa shock: human capital as a global growth determinant

H2.1 State finances during civil wars
P A B L O M A R T Í N – A C E Ñ A

H2.2 Property rights in the Russian Empire

3 The United States and Canada

I3 The Great Depression of the 1930s and the world economic crisis after 2008
K E V I N H J O R T S H Ø J O ’ R O U R K E

H3.1 Multi-divisional firms and managerial capitalism

H3.2 Business history and innovation

H3.3 Alfred D. Chandler, Jr.: the man behind modern business history

4 Latin America


I4 Was there a ‘curse of natural resources’?

H4.1 Latin America 1500–1800: early contact, epidemics and numeracy development

H4.2 The economic consequences of independence in Latin America

5 Japan

H5.1 Japanese industry during the Second World War

6 China

H6.1 International expositions and East Asia’s participation in the modern era

I5/6 Trade and poverty 1820–1913: when the third world fell behind

7 Middle East, north Africa and central Asia

I7 Women in global economic history
S A R A H C A R M I C H A E L , S E L I N D I L L I A N D A U K E R I J P M A

H7.1 Imperial expansion of the Ottoman Empire and its cultural determinants

8 South Asia

I8 Human stature as a health indicator in colonial empires

H8.1 Did brain-drain from India cause underdevelopment? Numeracy of Indian migrants and the Indian
population, seventeenth to twentieth century

9 Southeast Asia and Australia/New Zealand

H9.1 Pre-history, ancient and classical periods of Southeast Asia

I9 Institutional development in world economic history

10 Sub-Saharan Africa

H10.1 Why was Ethiopia not colonized during the late-nineteenth-century ‘Scramble for Africa’?
M A R J O L E I N ’ T H A R T




I.1 Global height trends (males)

I.2 Regional averages of democracy scores (polity2), 1810–2000s

1.1 Country-specific GDP per capita in north-western Europe

1.2 School enrolment in north-western Europe

1.3 Height (male) in north-western Europe

1.4 GDP per capita in north-western Europe and the world

1.5 Democracy in north-western Europe

I1.1 Real GDP per capita in European countries, 1270–1870

2.1 The human capital revolution in European regions (numeracy, fifteenth to eighteenth centuries)

2.2 Early GDP per capita development

2.3 Numeracy in selected Balkan and Caucasus countries

2.4 GDP per capita during the last 200 years for selected countries

2.5 GDP per capita in three European regions, 1810–2010

2.6 Height in three European regions and the World, 1810–1980 (males)

2.7 Numeracy in three European regions, 1810–1940

2.8 Growth of industrial production, 1870–1913

2.9 Polity IV index for participation in European regions

I2.1 Numeracy of the world regions during the nineteenth and twentieth centuries

I2.2 Maths and science cognitive skills, 1964–2003, and numeracy, 1820

3.1 Real GDP per capita in North America

3.2 Polity 2 scores of democracy in North America

3.3 Ratio of real GDP per capita of North American countries to real GDP in north-western Europe

3.4 Height in centimetres (male) in North America

3.5 Numeracy index in North America

I3.1 World industrial output during two crises

I3.2 World trade during two crises

4.1 Height development in selected Latin American countries during the nineteenth century (male height)

4.2 Economic crises of Latin America, 1820–2008

4.3 Real commodity prices

4.4 Latin America and the West, 1870–1930: per capita GDP and average years of education of population
aged 15 and above

I4.1 Energy prices in different locations, 1750/1800

H4.1 Development of numeracy in Latin American countries

5.1 Population and the rate of urbanization, 1525–1890

5.2 GDP per capita, 1600–1874: new estimates compared with Maddison’s

5.3 Growth of Japan’s GDP per capita, 1885–2010: comparison with the West and the world

H5.1 Change in the composition of national expenditure in Japan during the Second World War

6.1 Height in East Asian countries (male)

6.2 Basic numeracy in China and Japan

I5/6.1 Middle East: net barter terms of trade, 1796–1913

7.1 Urbanization rates in the Middle East and north Africa, compared with Europe

7.2 Real wages of unskilled urban workers

7.3 Numeracy in central Asia

7.4 Numeracy in selected Middle Eastern countries

7.5 Height in Middle Eastern countries (male)

7.6 Height development in the Middle East and the world (male)

7.7 Years of schooling in Middle Eastern countries, by birth decade

7.8 GDP per capita in selected countries of the Middle East

7.9 Life expectancies in selected countries of the Middle East

I7.1 Regional averages of the historical gender equality index, 1950s–2000s

I7.2 The average man and woman in 1900, 1950 and 2000

I7.3 Singulate mean age at marriage (smam) in selected countries and world average, 1900s–2000s

I7.4 Ratio of female to male parliamentarians in selected countries and world average, 1900s–2000s

I8.1 African stature by colonizing country

I8.2 Height development in India, Iran and Thailand (male)

H8.1 Basic numeracy of Indian migrants and the Indian population, seventeenth to nineteenth century

9.1 Southeast Asian pepper exports, 1500–1790

9.2 GDP per capita in Southeast Asia, 1900–2000

9.3 Male heights in Southeast Asia, 1800–2000

9.4 Average life expectancy at birth in Southeast Asia, 1900–2000

9.5 Average years of education for people aged over 15 in Southeast Asia

I9.1 Acemoglu/Johnson/Robinson index of institutional protection of capital-owners

I9.2 Per capita annual fiscal revenues

10.1 Average real wages in cities of southern Nigeria, Ghana, China and India, 1880–1950

10.2 Numeracy in South Asia and Sub-Saharan Africa (total), and in selected west African countries

10.3 GDP per capita in Angola, Botswana and South Africa, 1950–2010s

10.4 GDP per capita in Ghana, Ivory Coast, Kenya, Nigeria and Uganda, 1950s–2010s

10.5 Height trends in Ghana, Kenya and Tanzania, 1880–1960s (male)

10.6 Height trends in selected African countries and Italy, 1780–1840s (male)


1.1 Trade flows between European Empires and their colonies during the late eighteenth century

1.2 Regional economic specialization in Europe during the late seventeenth and early eighteenth century

2.1 Trade of grain and silver in Europe during the sixteenth century

2.2 Numeracy in European regions

2.3 Regional economic specialization in Europe during the later nineteenth century

3.1 Trade in North America during the eighteenth century

3.2 Regional economic specialization in the US during the late nineteenth century (selected industries and

4.1 Regional economic specialization in Latin America in the nineteenth century

4.2 Exports of Latin America around 1900

5.1 Trade and production centres in East Asia in the late sixteenth century

6.1 Regional economic specialization in China 1895–1949

7.1 Trade of the Middle East during the late eighteenth century

7.2 Regional economic specialization and export products in the Middle East during the nineteenth century

8.1 Trade and manufacturing in South Asia under the Mughals in the sixteenth century

8.2 Regional economic specialization in South Asia during the late nineteenth and early twentieth century

9.1 Trade in Southeast Asia during the seventeenth and early eighteenth century

9.2 Regional economic specialization and main export products in Southeast Asia around 1920

10.1 Trade of Africa 1450–1600

10.2 Export specialization in Africa, c. 1928


I.1 GDP per capita levels in Europe and Asia

4.1 Per capita GDP, 1500–2008: regional averages and ratio to the world average

4.2 A simplified typology of Latin American economies

4.2a GDP and export growth during the 1820–70 period

4.3 Per capita GDP in Latin America, 1820–2010

4.4 Determinants of volatility, 1870–2008

4.5 Export concentration: share of total exports, 1870–1973

5.1 New estimates of GDP per capita and sectoral shares in Japan, 1600–1935

5.2 Average annual growth rates of GDP per capita, 1500–1870: Japan in comparison with other Eurasian

6.1 1934–36 East Asian per capita GDP in 1934–36 US dollars and relative to the US

6.2 GDP structure in East Asian countries

8.1 Average annual growth rates of GDP by sector of origin, 1865–2007

8.2 Average annual growth rates of output per employee

8.3 Investment ratio and size of government, 1900–2007

8.4 Size of the external sector

8.5 Survey of living conditions in peninsular South India c. 1800

8.6 Agricultural wage in money and grain, 1784–2011

8.7 Consolidated data on economic growth and structural change in India, 1950–2007

9.1 Polity2 in Southeast Asia (autocracy–democracy on a –10 to 10 scale)

9.2 Merchandise trade exports per head of population, 1950–2010

10.1 Estimated slave departures from Sub-Saharan Africa in the different external slave trades, c. 1500–c.

10.2 Overseas investment in Sub-Saharan Africa, 1870–1936

10.3 Output and manufacturing in selected African countries in 1960


Pablo Martín-Aceña
Professor at the University of Alcalá, Madrid.

Franco Amatori
Professor of Economic History at Bocconi University, Milan.

Gareth Austin
Professor at the Graduate Institute of Geneva and professor of Economy History at the University of

Joerg Baten
Professor of Economic History at the Department of Economics, University of Tübingen.

Luis Bértola
Professor at the Universidad de la Republica, Uruguay.

Stephen Broadberry
Professor of Economic History at the University of Oxford.

Sarah Carmichael
Assistant Lecturer at Utrecht University.

Selin Dilli
Postdoctoral Researcher at Utrecht University.

Price Fishback
Thomas R. Brown Professor of Economics at the University of Arizona.

Rima Ghanem
Assistant Lecturer at Tübingen University.

Marjolein ’T Hart
Professor of the History of State Formation in Global Perspective at VU University of Amsterdam and Head of
the History Department at Huygens ING, The Hague.

Kris Inwood
Professor at the University of Guelph.

Salomón Kalmanovitz
Professor at the Universidad Jorge Tadeo Lozano Bogotá.

Debin Ma
Associate Professor at the Economic History Department at London School of Economics and Political

Ma Min
Professor at Central China Normal University.

José Antonio Ocampo
Professor in the School of International and Public Affairs and co-President of the Initiative for Policy
Dialogue at Columbia University.

Tetsuji Okazaki
Professor at the University of Tokyo.

Kevin Hjortshøj O’Rourke
Chichele Professor of Economic History, All Souls College, Oxford.

Irina Potkina
Professor at the Institute of Russian History, Russian Academy of Sciences, Moscow.

Auke Rijpma
Assistant Lecturer at Utrecht University.

Tirthankar Roy
Professor, Economic History, London School of Economics.

Osamu Saito
Professor Emeritus, Hitotsubashi University.

Catherine Schenk
Professor of International History at the University of Glasgow.

Martin Shanahan
Professor in International Economic and Business History at the University of South Australia.

Knut Sogner
Professor of Economic History at BI Norwegian Business School, Oslo.

Jan Luiten van Zanden
Professor in Global Economic History at Utrecht University.

Jeffrey G. Williamson
Professor at Harvard University and University of Wisconsin.


A history of the global economy – the ‘why’ and the ‘how’

Joerg Baten

For many years of our recent past, one’s country of birth predicted the income and welfare level of the majority of
the population: if you were born in a western European country or a country that was a previous European
settlement (such as the US), you would be relatively well off by global standards. If you were born in the developing
world, this would often not be the case. Many observers perceived this almost as a natural law. Even if that might
still hold on average, the rapid rise of income in China and other threshold economies over the last years cast doubt
on the persistence of development differences. This is even truer after the recent crisis in Europe and the US and
after the reappearance of territorial war in Europe.

To answer today’s questions, it is crucial to understand the economic history of the past: which countries
developed positively during the various periods of their history? This book of the history of the global economy will
trace the developments of many individual countries and their world regions. The ingredients of success (or failure)
will be the main focus. What was a good economic policy? Was there investment in education? Was there an
absence of war? Were there growth-promoting institutions?

In this volume, twenty-seven authors of various nationalities and intellectual traditions will present the welfare
development of the global economy and its components in a concise and accessible way. The authors will reflect on
the considerable increase in knowledge of global economic history and the history of world regions that has
occurred over previous years, both in the developed world as well as in countries with traditionally lower research
density in Africa, the Middle East, Asia and other world regions. A special focus of this volume will be on
developing countries that have received less attention in former world economic histories: was, for example, Africa
always a continent of relative poverty, or were there periods of economic growth in some of its regions? Why did
Asia fall behind in the early nineteenth and twentieth centuries?

This book will concentrate on the period from 1500 until today but with a slightly stronger focus on the recent
past. Ten world region chapters will present an economic history in a balanced way. The aim is to write a non-
Eurocentric history; hence, the chapters discuss world regions that have an approximately similar population size
currently. Each world region chapter will have circa 500 million inhabitants today.1 ‘Interlinking’ chapters will
summarize some of the core debates and topics studied recently. These interlinking chapters will also take a global
perspective on some of the core indicators and growth determinants. In addition, a number of shorter ‘highlight’
articles will focus on particular topics in economic history that shed light on especially astonishing developments,
such as why Ethiopia was not colonized and the productivity of Second World War industry in Japan.

We decided to consider a set of core indicators in the world regions so that a comparative picture emerges.
Among these indicators will be estimates of national income. The political and institutional dimension will be

represented by an index of democratic possibilities. In addition, recent research has suggested that indicators of
nutrition and health are important. Finally educational – and numerical abilities in particular – will be traced.
Indicators for these components of development will be described in the following pages. Their major advantages
are as follows: (1) they approximate some of the core dimensions of development such as income, political freedom,
health and education; (2) and they are available for a large number of countries also located outside the Western
world and for almost the whole nineteenth and twentieth centuries (and often earlier).2

In particular, the long-term history of developing countries sometimes required the use of new proxy indicators
that are less obvious in their informative values or in the possibility to measure them with a sufficient degree of
precision. We will therefore discuss their plausibility in detail in the following.

Gross domestic product (GDP) as an indicator of productive

One indicator that seems not to need much introduction is gross domestic product per capita (GDP/c). This is the
total national income of a country, divided by its population, following internationally established rules to measure
it. GDP has many advantages: it measures the people’s command over produced goods and services. These not only
provide direct utility to human beings, but they can also be used indirectly to improve health and education, which
again enhances well-being and utility in the future (Bolt et al. 2014). Hence, the growth of GDP per capita over the
last two centuries in many world regions had important consequences for the standard of living. Looking at various
countries, it becomes clear in this volume that lower growth in GDP in many of them caused dissatisfaction in their

In sum, GDP per capita is one of the most important concepts for tracing the development of the global
economy. Why, then, should we consider other indicators at all? There are several reasons why GDP should be
complemented with other measures of well-being. First, the rules for measuring GDP were designed for recent
decades (especially the period after the 1960s). For example, it is more difficult to estimate GDP for the UK in 1800
than in 1960 or for Malawi in 1800. Second, one big challenge is to construct informative series of prices over long
periods, often with large gaps in existing historical sources and documents. A major problem is also the appearance
of new products: what would have been the price of an iPhone in 1800? Economists have invested significant
thought in these problems and have devised convincing strategies, but any reader of economic history must be aware
that a national income estimate in 1800 does not necessarily have the same informative value as a GDP estimate of
2014. Hence, it is helpful to complement it with other measures. Third, while higher income can be used to improve
health and education, this was obviously not always achieved in human history. Also, rising inequalities within
countries sometimes resulted in lower welfare for the poorer part of the population, while average GDP per capita
was increasing. One strategy of economic historians has been to compare other indicators of welfare to countercheck
GDP estimates, which we will discuss below.

Height as an indicator of health and the quality of nutrition
Human stature is now a well-established indicator for the so-called ‘biological standard of living’, positively
correlated as it is, along with good health and longevity, with a nutritious diet.3 In the 1980s, Robert F. Fogel,
Richard Steckel and John Komlos pioneered its use in the field of economic history, and a large body of literature in
this and other fields has emerged since (Baten and Blum 2014a, Floud et al. 1990, Harris 1994, Komlos and Baten
2004, Moradi and Baten 2005, Steckel 2009). Anthropometric studies of individual countries have made a
significant contribution to social-welfare economics over the past several decades, particularly in developing
countries hitherto neglected because reliable data were lacking, but also in the developed world.

If economists are coming to use height as a valid complement to conventional welfare indicators, this is
because it has some specific advantages. A given income level permits the purchase of a given quality as well as
quantity of food and medical services, and is thereby correlated with health, which in turn is correlated with height.
However, this income–height correlation is not one-to-one, modified as it is by important inputs not traded in the
marketplace, but provided as public goods, such as infant-nutrition programmes and public hospitals, which account
for slight deviations between purchasing power-based and height-based measures of biological well-being. While
height is not without its deficiencies as a measure of the standard of living of a given population, it generates
insights into global changes, and is particularly valuable as a countercheck as well as a complement to conventional
indicators, permitting more reliable results than might otherwise be the case.

Life expectancy is among the many health indicators with which height is positively correlated. Having
analysed height data for the birth cohorts of 1860, 1900 and 1950, Baten and Komlos (1998) concluded that every
centimetre above and beyond a given population’s average height translates into a life-expectancy increase of 1.2
years. Thus a mere half-centimetre deviation from the average is significant, representing as it does six months of

The question of what role genetics, as well as nutrition, may play in determining a given population’s average
height was often raised in the early years of anthropometric research. It turns out that while genes are a key
determinant of an individual’s height, when it comes to groups of individuals genetic deviations from the mean
cancel each other out. Moreover, there is considerable evidence that it is environmental conditions, not genes, which
account for most of today’s height gap between rich and poor populations, including those inhabiting a single nation.
Habicht et al. (1974), for example, found that the height gap between the rich and poor sectors of a less-developed
country (LDC), Nigeria, was even wider than that between an LDC’s elite and a reference population in the US (see
also Fiawoo 1979 on Ghana; Graitcer and Gentry 1981 on Egypt, Haiti, and Togo).What is more, the height-
distribution percentiles for children from rich families in this last study are in line with those for a rich country,
namely the US. Of course, not all height differentials are due exclusively to environmental conditions: African
bushmen and pygmies, for example, spring to mind, although they account for only a small percentage of their
respective nations’ populations. However, after taking into account protein availability, disease environment, lactose
tolerance and food preferences (especially in more affluent countries) the height impact of ‘race’ seems rather small.

One important issue for all historical indicators, but the recently developed height indicator in particular, are
selectivities of the sources. Some of the sources used are samples, and it has to be assessed whether those are a
representative mirror of the underlying population, or whether they might be a selected group. How substantial are

these issues in the studies used? First, some typically biased samples – such as samples of students – were not
included in the national height estimates considered in our study. In general, preference was given to military
conscript samples and systematic anthropological measurements. The military conscript samples became available
after the concept of general conscription in the French revolutionary and Napoleonic armies spread throughout
continental Europe around 1800. Typically, every male of a certain age was measured and medically examined

(thereafter, the lot determined who joined the army). The files recorded everyone’s height.4 Hence, height estimates
based on this system are more representative than volunteer armies. Measurements recorded by scholarly
anthropologists were normally also a very comprehensive source with little underlying social selectivity. However,
the earliest anthropological measurements of the late nineteenth century were sometimes more difficult to use
because they were often quite localized. Only if a country was documented by a large number of regional

measurements (representing the various regions) could representativeness for national means be assumed.5 For some
countries and periods, only samples of prisoners, slaves and volunteer soldiers were available. In those cases,
selectivities were slightly more difficult to assess. However, for most of the countries, several sources were
available, and hence a comparison of height trends and levels recorded in different contexts was possible. Baten and
Blum (2014a) also ensured that no substantial regional biases were present in the height series that was ultimately
selected for a specific country (especially in large countries where regional height differences can be substantial).
One obvious problem in volunteer armies and prison samples is the dependence on the opportunity costs as
determined by the labour market. The preferred strategy in this case was to assess height samples that were recorded
for only one year (or for a short span of time, such as the US Civil War 1861–65) and that contained different age
groups. This allowed to keep the labour market conditions constant at the time of recruitment so that height, when
organized by birth cohort, could be analyzed.

Estimates of world-region trends for the entire 1810–1989 period indicate that the Anglo-Saxon settlements had
very high anthropometric values for much of the period under study, not converging with lower ones until the late
nineteenth century, and then only moderately (Figure I.1). Both western Europe and those countries in eastern
Europe and central Asia that had ever experienced socialist rule recorded a strong upward trend after the 1880s. In
contrast, levels in Latin America, the Middle East, and north Africa were at relatively high levels in the nineteenth
century but during the twentieth century experienced only modest increases. East Asia and Sub-Saharan Africa
remained near the global average throughout the entire period, except East Asia during the late nineteenth century.
Africa is the only world region in which the average height has steadily declined over the last two decades (Moradi
2009). Finally, both South and Southeast Asia remained at a low level throughout the period under study (Brennan
et al. 1994; Guntupalli and Baten 2006). In sum, we find that after the 1880s global heights increased on average,
but also became more unequal.

Figure I.1 Global height trends (males)

Source: modified from Baten and Blum (2014b).

We would like to end this overview with an example of research on the economic history of today’s developing
countries in which anthropometric measures provided new insights. In the economic history of the Middle East, for
example, evidence on welfare is particularly difficult to obtain. After reading studies on the deindustrialization of

this world region, it was difficult to understand why the governments did not attempt a more protectionist trade
policy and why they were not even alarmed. However, looking at anthropometric evidence about relatively high
biological welfare levels around the mid-nineteenth century in the Middle East, it became obvious that at first there
were no alarm signals from this side (this will be further discussed in Chapter 7 by Ghanem and Baten and in the
Interlinking Chapter 5/6 by Williamson).

Basic numeracy as an indicator of education
A considerable number of recent studies have used a proxy of basic numeracy that is based on the so-called ‘age-
heaping’ technique. This is the share of people who were most likely able to report their exact age (with an annual
resolution) rather than providing a rounded ‘heaped’ age. The age-heaping phenomenon applies to historical
populations (as well as people in the poorest countries today) when a substantial share of the people were not able to
state their exact age and instead gave responses, such as ‘I am 30’, when they were in fact 29 or 31 (A’Hearn et al.

Duncan-Jones (1990) employed this technique to study age data from Roman tombstones. Mokyr (1983)
suggested utilizing the age-heaping measure as an explicit numeracy indicator in economic history. He employed the
degree of age-heaping to assess the labour-quality effect of emigration on the Irish home economy during the first
half of the nineteenth century, as emigrants from pre-famine Ireland were less sophisticated than those who stayed

A’Hearn et al. (2009) found that the relationship between illiteracy and numeracy for LDCs after 1950 is very
close. They calculated both measures for not less than 270,000 individuals who were organized by 416 regions,
ranging from Latin America to Oceania. The correlation coefficient with illiteracy was as high as 0.7. The
correlation with the PISA results for numerical skills was even as high as 0.85; hence, the ABCC numeracy index is
more strongly correlated with numerical skills. They also employed a large US census sample to perform a very
detailed analysis of this relationship. They subdivided by race, gender, high and low educational status and other
criteria. In each case, A’Hearn et al. obtained a statistically significant relationship. Remarkable also is the fact that
the coefficients are relatively stable between samples, i.e., a unit change in numeracy is associated with similar
changes in literacy across the various tests. The results are not only valid for the US: in any country with substantial
age-heaping that has been studied so far, the correlation was both statistically and economically significant.

To assess the robustness of those US census results and the similar conclusions that could be drawn from the
LDCs of the late twentieth century, A’Hearn et al. (2009) also assessed numeracy and literacy in sixteen different
European countries between the Middle Ages and the early nineteenth century. Again, they found a positive
correlation between age-heaping and literacy.

There remains some uncertainty about whether age-heaping in the sources contains information about the
numeracy of the responding individual, or rather about the diligence of the reporting personnel who wrote down the
statements. The age data of the relevant age groups were normally derived from statements from the person himself
or herself. However, it is possible that a second party, especially the husband, may have made or influenced the age
statement, or even that the enumerator estimated the age without asking the individual. If the latter occurred, we
would not be able to measure the numeracy of the person interviewed. In contrast, if the enumerator asked and
obtained no response, a round age estimated by him would still measure basic numeracy correctly. A large body of
literature has investigated the issue of other persons reporting. Recently, Friesen et al. (2013) compared
systematically the evidence of a gender gap in numeracy and in literacy for the late nineteenth century and early
twentieth century and found a strong correlation between countries. They argued that there is no reason why the
misreporting of literacy and age should have yielded exactly the same gap between genders. A more likely
explanation is that the well-known correlation between numeracy and literacy also applies to gender differences.

There are various examples of how age-heaping based on estimates of numeracy have improved our
understanding of long-term development. One example is the relative decline of numeracy that took place in Latin
America and China during the nineteenth century: Latin America had a steep increase in numeracy in the eighteenth
century and China had already reached a high level by this time. But during the mid- to late-nineteenth century, both
world regions experienced declining or stagnating numeracy, whereas in western Europe and North America levels
remained high or increased. This might have contributed to the failure of China and Latin America of participating
in the second Industrial Revolution, which depended strongly on abilities in science and mathematics as those were
necessary to develop the new chemical and electrical industries.

In sum, age-heaping-based numeracy estimates education and, in particular, is a proxy for numerical skills. As
such, it is an important component of human capital and a precondition for more advanced skills. A perfect human
capital measure would be a composite index of basic and advanced text-related skills, of basic and advanced
numerical skills, of technological skills, of social and organizational creativity and perhaps of other components.
However, given that such perfect composite indexes are impossible to construct in most real world situations,
scholars often use proxy indicators for more broad concepts. Numeracy has the additional advantage that it is
particularly growth-relevant (see Interlinking Chapter I.2 by Baten).

The polity IV index as an indicator of democracy
Marshall et al. (2009) suggested approximating the development of democratic values with the polity IV dataset. In
this dataset, countries are characterized by a score between +10 (fully democratic) and –10 (fully autocratic). The
score is actually a composite index that is based on six component variables because the authors argue that political
participation is not only a suffrage right but also access to executive function and constraining mechanisms. Among
the six components, there are three that relate to the access possibilities to executive functions in the government: (1)
how is the recruitment of the chief executive regulated? (2) Is the recruitment of executives in general competitive,
or is it clear from the beginning who will obtain power? (3) How open is executive recruitment? Next, there is a
variable (4) that considers the constraints of the executive: can the government executive act at will, or do other
political bodies and institutions constrain their activities? Finally, the last two components indicate whether
participation in elections is (5) regulated and (6) competitive. Each of the six components is characterized with a
numerical index value, and the final polity IV measure is the average of these individual component values.

In many cases, these six variables tend to be correlated with each other. However, there are also cases, for
example, in which ‘show-case’ elections are held, whereas the access to executive power is de facto in the hands of a
political or ethnic group; this reduces the democratic value of elections greatly, of course.

In the economic history literature, the component of ‘constraining the executive’ has received particular
attention; Acemoglu et al. (2001) argued that an unconstrained executive is more likely to expropriate business
enterprises and to develop a climate that is not growth promoting. Therefore, there are at least two dimensions that
make this variable so important in our volume: the growth-retarding function of unconstrained executives but also
the more general welfare function of democratic participation. The world region trends are characterized by an early
lead of the ‘Western offshoots’, and substantial variability during the twentieth century (Figure I.2).

Figure I.2 Regional averages of democracy scores (polity2), 1810–2000s

Source: based on Marshall, Jaggers and Gurr (2011). ‘Western offshoots’ includes North America, Australia
and New Zealand, ‘NW’ means north-west; ‘ESC’ means East–South–Central.

In sum, this set of four variables allows us to provide evidence on income, health, education and democracy in
a large number of countries over past centuries. While the indicators are not without potential problems, they allow
us to trace a global economic history even for world regions that received less attention before, such as Africa, Asia
and Latin America. Of course, these four indicators are not appropriate for all countries and world regions, hence
they are not all employed in each chapter. The chapters also differ intentionally in their focus on historical
description (of which more is included in Chapter 2, on eastern, southern and central Europe) or historical analysis
(north-western Europe, for example), because some world regions such as the latter have been described by many
previous authors, hence the descriptive part can be slightly shorter here.

Clearly, there are many measurement issues if these indicators are estimated for individual countries and world
regions. In a relatively short book, not all country-specific issues can be discussed. Some general issues have been
addressed in this short introduction. Readers who would like to learn more about the data quality and data
availability in individual countries can obtain more information using the internet platform and
the recent book by van Zanden et al. (2014).

How was the group of twenty-seven authors of this volume formed? An important institution in the discipline
of economic history is its global organization, the International Economic History Association (IEHA). This
institution was founded in the early 1960s and regularly organizes world congresses.8 The authors of this volume

meet regularly at these occasions, and the idea to write a balanced history of the global economy was born at one of
its meetings (in the Executive Committee); the Secretary General at that time (Joerg Baten) was asked to realize the
creation of this volume, acting as editor. Cambridge University Press and its history editor, Michael Watson, agreed
to publish the book, for which we are very thankful, and our thanks also go to several readers who reflected on both
the initial proposal as well as the whole book manuscript, and to Sevket Pamuk for his comments on the Middle East
chapter. Last but not least, we thank all participants at world congresses and all students of economic history for
their important input in this volume.




1. Only China and South Asia are substantially above average as large countries cannot be appropriately split.
Chapters on Japan and China were introduced separately. One world region is slightly smaller than the average:
north-western Europe. However, as it is likely that much more than half of the whole economic history literature
refers to this region, we think that this exception is justified.

2. The historical values for countries whose size changed over time will refer generally to current territory (to
make long-run comparisons possible). All world regions and the global average are weighted by their
corresponding population size. Additional indicators of development – which will be discussed if evidence is
available – are life expectancy, real wages, school enrolment, war and civil war occurrence and others.

3. Komlos (1985) suggested the term ‘Biological Standard of Living’ in 1985. On the following, see Baten and
Blum 2014a, Moradi and Baten 2005.

4. Except for the small share of illegal emigrants (clergymen were also exempt).

5. The very earliest anthropological data could sometimes not be used as anthropologists sometimes intended to
find certain extremes (such as ‘the tallest African tribe’, etc.).

6. Around 20 per cent clearly had an age that was a multiple of five; therefore, the numeracy needs to adjust for
this. Usually ages 23 to 72 are considered. For further details, see Crayen and Baten (2010). The calculation of the
ABCC Index is shown here as a derivation of the Whipple Index:

7. De Moor and van Zanden (2006) studied the relative numeracy of women during the Middle Ages, and Clark
(2007) has recently reviewed the evidence.

8. In spite of this, the present volume is not the ‘official’ economic history of the IEHA, but a book representing
the views of the authors.


A’Hearn, B., Baten, J. and Crayen, D. (2009), ‘Quantifying Quantitative Literacy: Age Heaping and the History of
Human Capital’, Journal of Economic History 69 (3), 783–808.

Acemoglu, D., Johnson, S. and Robinson, J. (2001), ‘The Colonial Origins of Comparative Development: An
Empirical Investigation’, American Economic Review 91, December 2001, 1369–1401.

Baten, J. and Blum, M. (2014a), ‘Why are you Tall while Others are Short? Agricultural Production and other
Proximate Determinants of Global Heights’, European Review of Economic History 18, 144–65.

Baten, J. and Blum, M. (2014b), ‘Height’, in J. L. van Zanden et al. (eds.), How Was Life? Global Well-being Since
1820, Paris: OECD.

Baten, J. and Komlos, J. (1998), ‘Height and the Standard of Living’, Journal of Economic History 57 (3), 866–70.

Bolt, J., Timmer, M. P. and van Zanden, J. L. (2014), ‘GDP per Capita’, in J. Baten, M. P. Timmer and J. L. van
Zanden (eds.), How Was Life? A Long-term Perspective on Global Well-being and Development, Paris: OECD (ch.

Brennan, L., McDonald, J. and Shlomowitz, R. (1994), ‘Trends in the Economic Well-being of South Indians under
British Rule: the Anthropometric Evidence’, Explorations in Economic History 31, 225–60.

Clark, G. (2007), A Farewell to Alms: A Brief Economic History of the World, Princeton University Press.

Crayen, D. and Baten, J. (2010), ‘Global Trends in Numeracy 1820–1949 and its Implications for Long-Run
Growth’, Explorations in Economic History 47 (1), 82–99.

De Moor, T. and van Zanden, J. L. (2006), Women and the Origins of Capitalism in Western Europe, Amsterdam:

Duncan-Jones, R. (1990), Structure and Scale in the Roman Economy, Cambridge University Press.

Fiawoo, D. K. (1979), ‘Physical Growth and the School Environment: a West African Example’, in W. A. Stini
(ed.), Physiological and Morphological Adaptation and Evolution, The Hague: Mouton (pp. 301–14).

Floud, R., Wachter, K. W. and Gregory, A. S. (1990), Height, Health, and History: Nutritional Status in the United
Kingdom, 1750–1980, Cambridge University Press.

Friesen, J., Baten, J. and Prayon, V. (2013), ‘Women Count. Gender (In-)Equalities in the Human Capital
Development in Asia, 1900–1960’, Working Papers in Economics and Finance No. 29, University of Tuebingen.

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North-western Europe

Jan Luiten van Zanden

North-western Europe played a crucial role in the world economy: it was the pioneer of the ‘modern’ market
economy and of ‘modern economic growth’ that resulted from it, and came to control large parts of the world. At the
same time, there were quite different roads to modernity, even in this relatively small part of the world; the United
Kingdom held the middle in between early developers (in the Low Countries) and latecomers (the Nordic countries
and Ireland). The urban, most dynamic core of the region was in Flanders and Brabant in the late Middle Ages, then
moved to Holland in the seventeenth century, and crossed the North Sea in the second half of that century, when
England started its growth spurt that would result in the Industrial Revolution of the post-1750 period. After 1800
the techniques and institutions of the Industrial Revolution began to spread from the UK to Belgium at first, but
within a few decades to almost all parts of north-western Europe. Gradually, the process of economic growth spread
to the rest of the region; the nineteenth century saw the ‘catching up’ of the northern countries, which had not
developed rapidly before 1800. In the twentieth century this process of convergence within north-western Europe
continued; after 1945 the UK lost its prominent place within the world economy to become the ‘sick man’ of the
region in the 1960s and 1970s, but it rebounded afterwards. The northern countries continued their spectacular
advance during the twentieth century, becoming the best examples of welfare states with strong economies based on
high levels of human capital formation and innovativeness.

There are many stories to tell about the economic development of this region, but we have to focus on three: (1)
why this part of the world experienced rapid economic expansion between 1500 and 1850, resulting in the British
Industrial Revolution; (2) how this economic core region developed after 1850, when its model – and in particular
its technologies – were increasingly copied elsewhere; and (3) how the more ‘marginal’ parts of the region
(Scandinavia, Ireland) caught up from about the mid-nineteenth century onwards.

Early growth and modernization
It is one of the big questions of economic history why the North Sea region, which was a rather marginal part of the
European economy until the high Middle Ages, became the economic powerhouse of Europe (and arguably the
world) in the centuries before the Industrial Revolution. Before about 1600 the Mediterranean – and in particular
northern Italy – was the most highly developed part of Europe, but already from the thirteenth and fourteenth
century onwards, first the Low Countries, then followed by England, developed strongly, first to become an
alternative centre of urbanization and growth (1200–1600), and after 1600 to really overshadow the old
Mediterranean core. It was the Low Countries and Great Britain that in the long run profited the most from the
expansion of the Atlantic economy and the growth of trade with Asia, in spite of the fact that in both regions they
were latecomers by about one century, after the pioneering efforts by Portugal and Spain. Why did the Dutch and the
English reap where the Iberians sowed?

The most convincing answer is probably that in the North Sea area a set of institutions had emerged that was
very conducive to growth. An often used example of this concerns the way in which the commercial empires of
Iberia and the North Sea area were organized: in Spain and Portugal it was basically state enterprises in which
private entrepreneurship played a limited role; in the north it was the other way around: the state offered
encouragement (via monopolies and chartered companies) but the private sector was in charge. This fundamental
contrast reflected deep-seated institutional differences. In the late Middle Ages institutions to constrain the power of
the king such as Parliaments had emerged almost everywhere in western Europe (the first one was set up in Spain,
the Cortez of Leon dated from 1188). At the same time, however, kings built up a stronger power base – a standing
army, new sources of taxation and independent bureaucracy – which allowed them to rule without the ‘feudal’
parliaments and claim ‘absolutist’ power. The clash between civil society organized in parliaments (and in cities)
and the rising power of the sovereign almost everywhere resulted in victory for the latter – except for two cases: the
Dutch Republic after 1572 (born out of an eighty-years war with the absolutism of the Spanish kings), and England
after 1640 (or 1688). In both cases Parliament (or the Estates General as they were known in the Netherlands)
established a firm grip on power – or even became the supreme authority in the polity. It resulted in an entirely
different balance of power between sovereign and civil society – this institutional ‘little divergence’ helps to explain
the economic ‘little divergence’ that occurred at the same time (van Zanden, Buringh and Bosker 2012).

Another important part of the institutional framework of the North Sea area concerned the way in which family,
household and marriage was organized. In the late Middle Ages the region saw the rise of the European marriage
pattern (EMP), in which marriage was based on consensus (the boy and girl selected each other voluntarily) and the
new couple set up their own household after marriage. This resulted in high ages of marriage (more than 23 years for
girls), a relatively large share of singles in the population and the absence of a strong boy preference. This ‘delayed’
marriage created possibilities for increased human capital formation for both men and women; during their teens and
early twenties, many worked as servants or apprentices in the households or crafts shops of others, developing their
own networks and building up job experience. As fertility decisions are in most societies heavily influenced by
female agency and human capital, this new demographic pattern can be seen as a first step in the switch from
‘quantity’ to ‘quality’ of offspring. Its most notable result was a gradual accumulation of human capital through the
expansion of formal and informal education (de Moor and van Zanden 2010; Voigtländer and Voth 2012).

The EMP was embedded in a highly developed labour market, with employment opportunities for both men
and women. In the North Sea region a large part of the population – both in the cities and in the countryside – was
dependent on wage labour, and agricultural activities were increasingly commercialized, also thanks to the high
level of urbanization leading to a very dynamic demand for foodstuffs. Capital markets were also highly developed,
offering credit to households at interest rates which still would be considered very reasonable (5–6 per cent in
Holland in the fifteenth and sixteenth century, dropping even more thereafter) (van Zanden, de Moor and
Zuijderduijn 2012). Land markets were equally flexible, resulting, for example, in large changes in the distribution
of agricultural holdings towards large units in both England and the Netherlands; in England this process lead to the
emergence of large estates and the proletarianization of the farming population (Allen 1992).

Jan de Vries and Ad van der Woude (1997) have analyzed these changes for the northern Netherlands, and
concluded that this was the ‘first modern economy’ that generated a process of ‘modern economic growth’ leading
to the Dutch Golden Age of the seventeenth century. Seen from a broader perspective, the Dutch economic miracle
was part of a process of sustained economic growth in the North Sea area that began with the shock of Black Death
of 1347 (which lifted gross domestic product [GDP] per capita by about a third), and continued until the early
nineteenth century. During these 550 years the average GDP per capita of the region increased by 0.18 per cent per
annum; at about 1810 there was a distinct acceleration of growth, to the ‘normal’ rate for the nineteenth century of
about 1 per cent annually (van Zanden and van Leeuwen 2012; Broadberry et al. 2011).

Growth between 1350 and 1800 was partly driven by endogenous changes such as the rise of literacy and other
forms of human capital formation, capital accumulation (made possible by the trend towards lower interest rates)
and technological change – culminating in the ‘wave of gadgets’ that resulted in the Industrial Revolution after
1750. But the expansion of commercial empires and the growth of trade also contributed significantly. The highest
incomes were earned in international services (trade, shipping, banking), and the cities that managed to become the
central hubs in these networks (Antwerp, Amsterdam and London respectively), prospered greatly. Map 1.1 shows
the European Empires and their most important trading commodities. It becomes clear that most colonial trade was
concentrated in north-western Europe. The Dutch economy was strongly dependent on the Baltic trade for its bread
and timber, and the Dutch East India Company set up in 1602 was (initially) extremely successful, highly profitable,
a large employer of sailors and soldiers which created an Asian commercial Empire out of proportion with the
modest size of the country from which it originated. On an even larger scale Great Britain repeated the experience. It
not only put together an Asian Empire (with India gradually becoming the ‘jewel in the crown’), but was equally
successful in North America and the Caribbean. It was the dynamic development of the Atlantic economy that
contributed much to the rise of England as the new core of the world economy after 1650 (Acemoglu et al. 2005).
Political institutions – growing state capabilities to wage war, create a mighty navy, raise taxes – enhanced these
commercial developments, an alliance symbolized by Cromwell’s Navigation Acts. That the North Sea area in the
long run profited the most of the expansion of international trade, and not Portugal and Spain that had pioneered the
new trade routes, points to its strong competitive position in this field.

Map 1.1 Trade flows between European Empires and their colonies during the late eighteenth century.

Redrawn and modified after Atlas of World History, ed. by P. O’Brien, Oxford University Press, 2002.

The proceeds of growth were very unequally distributed however. Real wages lagged behind real incomes, and
in the most prosperous parts of the region real wages in the eighteenth century were at best at about the same level
as they were before the ‘price revolution’ of the sixteenth century (Allen 2001). Inequality of income and wealth
increased rapidly, paralleling the growth of urbanization and average income levels. Both Holland and England
became very unequal societies with a huge gap between the rich and the poor, but paradoxically this did not
undermine the new political structures that had emerged after 1572 and 1688 respectively. As a counterbalance to
growing income gaps, literacy and numeracy were growing rapidly, probably following the expansion of secondary

and tertiary activities – first in the Low Countries (where already in the sixteenth century the majority of urban
citizens was literate and numerate), followed by England, northern Germany, northern France and Scandinavia. The
Reformation with its emphasis on the reading the Bible also contributed significantly to this process – it for example
induced governments to pay more attention to schooling (the Swedish case is a well-known example).

The Industrial Revolution – the arguably most important watershed in economic history – was in many respects
the logical culmination of the trends set at the end of the Middle Ages. All recent interpretations of the phenomenon
start from the situation that already in 1750 Great Britain was a highly developed economy, with a large urban
sector, well developed markets and institutions, a skilled labour force earning high wages thanks to their labour
productivity. In Allen’s (2009) interpretation of the Industrial Revolution it was a process of substitution of labour
by capital, made possible by low energy costs (cheap coal), low capital costs and high real wages (in comparison
with the rest of the world). In Mokyr’s (2002) more ‘idealistic’ approach the amazing capacity of British engineers
to invent new labour saving machines was induced by the spread of Enlightenment ideas of experimentation and
rational enquiry. But such favourable conditions were necessary for the industrial transformation – the growth of
steam power, the rise of the factory system, the increase of industrial employment, the spectacular expansion of
industrial exports – that occurred between about 1750 and 1850, which only after about 1810 led to an acceleration
of GDP per capita growth.

The spread of the Industrial Revolution in the nineteenth

The early nineteenth century acceleration of growth was a remarkable phenomenon, because it not only occurred in
Great Britain (as a result of the industrial transformation it was undergoing), but almost everywhere in north-west
Europe and, even more surprisingly, in other parts of Europe as well. The reconstructed series of GDP show for
most European countries almost no growth between 1500 and 1800; some countries, such as Italy, even show
remarkable decline (Bolt and van Zanden 2014). But this suddenly ends at about 1810/1820, and most series show
growth during the second quarter of the nineteenth century. Growth is more intensive in the north-west, which
forges ahead of the rest of Europe until about 1870, when a process of convergence began.

But the most remarkable fact is the sudden break during the early nineteenth century. For parts of the region it
coincided with the diffusion of the new technologies to the continent – to parts of Belgium at first, but soon followed
by regional concentrations of modern industry in Germany (Rhineland), northern France and Switzerland. Different
regions responded differently: where coal was available, mining and iron industry developed rapidly (such as in
Namur and Liège – the rapidly industrializing Walloon parts of Belgium) (Pollard 1981). The existence of
widespread proto-industrial activities was the precondition for a rapid growth of factory-based textile industry, often
based on water power at first, but gradually coal and steam also took over (see Map 1.2 for proto-industrial textile
production all over north-western Europe). But in regions with high levels of agricultural productivity – in the Dutch
coastal provinces, for example – incentives to move to labour intensive industry were quite weak, and industrial
growth arrived relatively late – that is after 1860.

Map 1.2 Regional economic specialization in Europe during the late seventeenth and early eighteenth century

Source: See map 1.1.

An alternative interpretation of the break at about 1815 is that it was linked to the ending of the Napoleonic
wars. Europe had, finally, after twenty years of almost uninterrupted warfare, found a new more or less stable set of
institutions to regulate its international affairs (the Vienna Congress had been quite successful, even in finding a
solution for France), which created the right conditions for a long period of peace only ending in August 1914.

Moreover, the reforms introduced after the French Revolution in the political and institutional spheres – from the
streamlining of the European state system (in particular in Germany) to the introduction of a highly rationalized
legal system, the Code Napoleon – also may have had strong positive effects on long-term growth. Conscious
policies to reduce transaction costs via the abolishment of all kinds of ‘feudal privileges’ – such as international
treaties to ban the many tolls that restricted free trade on for example the Rhine – also contributed to the freeing of
international markets (Acemoglu et al. 2011). The same years at about 1820 saw a break in market integration:
markets in Western Europe became more integrated, pointing to declining transaction costs. Soon the new
technologies of the Industrial Revolution started to kick in as well: steamships and in particular trains that began
their expansion in the 1830s, were able to reduce transport costs considerably. The telegraph (an invention of the
1840s) revolutionized information costs and had even more dramatic effects on market integration. The
liberalization of international trade in the 1850s and 1860s, following the abolishment of the British Corn Laws,
completed the process.

Due to these changes, during the first decades of the nineteenth century a process of ‘modern economic growth’
began in north-west Europe, based on the new (British) technologies and on a (French) rationalization of
institutions. Belgium profited the most from the relatively peaceful century between 1815 and 1913 and developed
into a small, open economy focused on industrial exports that competed with Great Britain. It developed strong ties
between basic industry and the banking sector and as such was one of the pioneers of the ‘organized’ capitalism that
was a feature of twentieth-century Europe. Denmark was another ‘success story’, in this case based on agricultural
exports and an industrialization process that was largely focused on the growing internal market. Both countries saw
their GDP per capita increase threefold (or slightly more) (all GDP estimates from Maddison 2001). Sweden (with a
much larger industrial sector thanks to coal, iron and copper mines and related industries) and Norway did almost
equally well, only ‘distant’ Finland lagged behind. The two pioneers of early modern growth, the UK and the
Netherlands, started the nineteenth century with real income levels much higher than in the rest of the region, but
also saw a more than doubling of GDP per capita. Ireland is obviously a special story: it was the poor cousin of the
British during the first half of the nineteenth century, then, in 1845–47, was struck by one of the worst famines in
European history due to the sudden collapse of the potato harvest. It led to massive out-migration to the United
States, which resulted in a sharp drop in population in the second half of the nineteenth century. Per capita growth,
which was not spectacular (the gap with Great Britain remained huge) was as much the result of real growth as of
the population decline (O’Grada 1995).

France started at a lower level of GDP per capita in the early nineteenth century, compared to Great Britain and
the Netherlands (Figure 1.1). Why was this the case? A number of potential explanations have been discussed and
rejected. For example, the lack of nationwide representative institutions has been named a determinant, because it
could have reduced the creditworthiness of the government: there was no national parliament as it existed in
England (on this and the following, see Hoffman 2003). The forced emigration of Protestants could be another factor
causing the lower level of income per capita in France, but Benedict (1996) showed that French Catholics and
Protestants before the expulsion tended to have similar thriftiness, although the educational impact has not yet been
evaluated. The enclosure movement that took place in England also did not happen in France, but British studies
argued that enclosures had only a small effect, if any. Hoffman (2003) concludes his survey that the lower starting
point of France was probably caused by the generally higher transaction costs in France. Fragmented property rights
and a legal system that did not favour efficiency increased transaction costs. In addition, the many wars and a

military preference in all issues of transaction cost-reducing infrastructure did not help to promote economic
growth.1 However, during the nineteenth century France modernized its institution and also invested heavily in
schooling, making it one of the global leaders in school enrolment (Figure 1.2). Towards the end of the century and
during the early twentieth century, France also converged in GDP per capita with Great Britain (Figure 1.1).

Figure 1.1 Country-specific GDP per capita in north-western Europe (in logs)


Figure 1.2 School enrolment in north-western Europe


The ‘catching up’ of the Scandinavian countries was probably the most remarkable phenomenon in this region
during the nineteenth century. These countries had two assets: relative high levels of human capital formation, the
result of the Reformation and related government policies, and relatively democratic institutions at the national
level, rooted in local democratic traditions. The Swedish Rikstag had developed into a very active Parliament
already during the ‘Era of Liberty’ (1719–72), and this tradition continued into the nineteenth century, laying the
basis for the transition towards modern democracy at the end of that century. It was, moreover, relatively well
developed ‘nation states’, culturally homogenous, which mostly were able to keep themselves aside from the
conflicts between the great powers. Their economic rise during the nineteenth century was on the one hand based on
the – in terms of social and human capital – favourable starting point. The different countries and regions developed
their own niches in the expanding international economy: Denmark specialized on agricultural exports, Norway in
shipping, Sweden was in a way the ‘powerhouse’ of the region with a strong industrialization process commencing
in the 1860s (Schön 2012), and Finland (and Norway and Sweden) exploited their huge timber resources, first via
the exports of the timber itself, towards the end of the century by switching to the end product, paper. But like
Ireland, the poor periphery of Scandinavia, Finland, was struck by a major harvest failure, in 1867–68, which wiped
out 15 per cent of the population (Hjerppe 1989).

The region as a whole profited from the first wave of globalization of the world economy between 1850 and
1914. Migration flows expanded, not only from Ireland, but also Sweden and Norway, and at a much lower level,
from the more prosperous Denmark, Belgium and the Netherlands (O’Rourke and Williamson 1999). International
trade grew rapidly: the UK formed the most dynamic market for the agricultural exports from Denmark, the
Netherlands and Sweden and for the international shipping services offered by the sizeable Norwegian fleet. But
after 1870 Germany became also in this respect the rival of the British. Its rate of growth and the pace of its
industrialization was substantially higher than the British, where a mild growth retardation occurred after 1870. In
particular British agriculture found it hard to accommodate to the new globalized world, which resulted in much
lower agricultural prices due to increased American competition. The sharp reductions in transport costs and the
increased migration flows now ‘finally’ brought relative prices and wages from both sides of the Atlantic much
closer together. Moreover, the British state was now totally committed to free trade (whereas other countries, such as
Germany and France, increased protection for their agricultural sector). Denmark and the Netherlands also stuck to
their free trade policies, as they profited from the cheap imports of cereals (used as feedstuffs for their cattle and
pigs) and could increase their exports of butter and meat of which the prices were more stable (Tracy 1989).

Cheap (imported) food and rapid industrial growth resulted in sharp increases in the standard of living in the
whole region. Before 1870, workers had hardly profited from the economic growth that occurred, as prices of
foodstuffs had increased more rapidly than most other prices. This ‘early growth paradox’ is clearly evident in the
data on heights (the ‘biological standard of living’) which for this region show a modest decline during the first half
of the nineteenth century (see Figure 1.3). Measured in this way, the North Sea area was only marginally more
wealthy than the rest of the world, whereas in terms of GDP per capita the gap with the world average was quite big
(Figure 1.4). This early growth paradox – the fact that the first decades of industrialization often did not result in a
comparable increase in living standards (Komlos 1998) – is probably related to the costs of urbanization (high food

prices, high rents). But the ‘agricultural invasion’ that began after 1870 solved these bottlenecks, and real wages and
other indices of the standard of living increased rapidly after that date. To a much lesser extent the next upturn in the
agricultural cycle, the increase in the international price level after 1896, had a similar effect, in the sense that real
wages also did not increase a lot between 1896 and 1913.

Figure 1.3 Height (male) in north-western Europe

Source: based on Baten and Blum (2014a).

Figure 1.4 GDP per capita in north-western Europe and the world (in log of 1990 dollars)


The twentieth century rollercoaster: 1914–45
The various parts of north-west Europe were affected differently by the (largely) exogenous shock of the First World
War. Belgium and northern France were devastated by the German forces and by continuous warfare on its territory;
the UK was almost as heavily involved – its losses of human lives, physical and monetary capital were huge, and in
terms of its international position it never fully recovered from the sacrifice. Scandinavia and the Netherlands, on the
other hand, remained neutral and profited from the new circumstances – such as a booming demand for raw
materials and foodstuffs and the disappearance of international competition for its exports. Finland, part of the
Russian Empire since 1809, used the power vacuum created by the Russian Revolution, to successfully declare
independence. A few years later, in 1919, the Irish followed their example and finally acquired independence in
1921. Social and political upheavals towards the end of the war were an almost universal phenomenon, and reflected
the economic problems of these years. On the one hand limited social groups profited from the war, the rising prices
and the many (illegal) opportunities for trade and profit. The poor and middle classes suffered: the supply of grains
from the US was stopped due to the ‘unlimited’ naval warfare by the Germans, international markets and transport
channels stopped working and scarcity became an urgent phenomenon. The Armistice of November 1918 was the
start of an extreme boom on world markets to satisfy these urgent needs, which lasted until the end of 1919. Then,
suddenly, the bubble burst, and it was followed by an equally sharp decline of prices on international markets.

In the neutral countries – Sweden, Denmark, Norway, the Netherlands – where the postwar boom was the
continuation of strong inflationary tendencies during the war itself, the sudden deflation of 1920–21 led to problems
in the financial sector, in banking in particular. Governments and/or central banks had to step in to rescue large
banks, and the financial crisis of the early 1920s led to a decade of sluggish growth and high unemployment
(Broadberry 1984). The Netherlands was the exception here: it had a modest financial crisis (in 1921–23) but the
effect on growth and employment was limited, perhaps because the country profited from the German growth in the
same years. Belgium was even less harmed by the downturn of the early 1920s, focused as it was on the rebuilding
of its infrastructure and economy; in its monetary policy it followed France (or was forced to follow it), which
resulted in a sound undervaluation of its currency after 1926. The UK did not fare much better than the
Scandinavian countries: perhaps because of its monetary policy (a return to the gold standard at the old parity),
perhaps because of slowly emerging structural problems in its main industrial centres and sectors – coal, iron and
cotton – due to sharply increased international competition. Circumstances at international markets had certainly
changed fundamentally during the First World War; the City lost its control over international capital markets to
New York, which also made it much more difficult to monitor the gold standard (as the British Central Bank had
managed to do before 1914) (Eichengreen 1992).

In the 1930s the tables turned. The countries that had had a poor 1920s, and that were weakened internationally
as a result, were the first to be forced off gold in 1931: the UK’s position became untenable in September of that
year, and the Scandinavian countries (which had kept part of their international reserves in pounds sterling) all
followed immediately. In this way they escaped from the second stage of the deflationary shock of 1929–33, and
immediately improved their competitive position vis-à-vis the remaining gold block countries. For them, the worst
was over by 1932; for Belgium and the Netherlands, which stuck to gold until 1935 and 1936 respectively, the
depression continued for another three to four years (Eichengreen 1992).

Towards the end of the 1930s the international rearmaments race lifted the world economy out of its
depression. But soon war broke out, and now almost all countries became involved – Sweden being the only
‘neutral’ exception. War was even more total than between 1914 and 1918, and resulted in huge drops in output and
income, in particular towards the end, when scarcity became an extreme problem in regions still occupied by the
Germans (the western part of the Netherlands struggled through a ‘hunger winter’ in 1944–45). Scarcity was and
remained for some time a normal feature of life – even in the UK, which profited from the generous supplies from
its overseas allies.

Below the surface of these huge swings in economic activity, the region continued to modernize between 1914
and 1945. Labour productivity growth was in general even faster than in the good old days before the First World
War, due to the rapid spread of new technologies linked to the second Industrial Revolution. Electricity was perhaps
the most important in this respect – the spread of the electric engine, for example, facilitated huge increases in
productivity. Other new technologies (internal combustion engine, the radio and the telephone, new ‘artificial’ fibres
such as rayon) continued to spread, in spite of the violent business cycles of the period. Research and development
activities were professionalized, and small economies such as Sweden and the Netherlands became relatively
important sources of technological change. Only the British economy showed signs of structural problems,
particularly in the north which had dominated during the nineteenth century Industrial Revolution. Its turn, during
the 1930s, towards closer links with its colonies via a system of ‘imperial preference’, signalled that this once
dominant player in the world economy was now much less confident about the potential and competitiveness of
British industry.

Social and political transformations also continued during the interwar period. The revolutionary 1910s saw the
final establishment of full participative democracy – including voting rights for women – in almost all countries of
the region (Belgium introduced women’s suffrage only in 1948); measured by the Polity IV index, the region came
close to a full 10 score in 1920 and 1930 (Figure 1.5). The 1910s and 1920s also saw a sharp reduction in income
inequality in large parts of the region, and an extension of welfare services supplied by the state. The growth of the
trade union movement, and of (related) labourist political parties happened simultaneously. Sweden, ruled from
1917 onwards by governments in which the social-democrats participated, is the classic example, but similar
changes – often related to the extension of the franchise in these years – were typical for the whole region. The
1910–40s were therefore no ‘lost decades’, but years in which the basis was created for rapid growth of the welfare
state after 1945.

Figure 1.5 Democracy in north-western Europe

Source: calculated from Marshall et al. (2011).

Peace and welfare: 1945–2010
After the Second World War the region, as the world economy as a whole, entered a new phase of stability, rapid
growth and the extension of the welfare state. Until the mid-1970s growth was spectacular in the Scandinavian
countries and the Netherlands, and quite fast in Belgium, France, the UK and Ireland. The region as a whole profited
from the return of political and economic stability, and the process of European integration that came to symbolize
this. But there were large differences in the way in which countries participated in this process.

Growth after 1945 was in many respects the continuation of the economic modernization that had begun after
the second Industrial Revolution. One of its most important features was that it was much less tied to the geography
of coal – thanks to electricity. The Nordic countries also profited from a different source of energy, water power, as
a major source of cheap energy. By contrast, the countries that had pioneered the first Industrial Revolution were
handicapped by its legacy – the old industrial districts with coal mining, iron industry and textiles started a long
decline due to rising international competition and declining demand. From the 1960s onwards, some of the
industries which had dominated earlier growth – shipbuilding, electronics, automobiles – also came under increasing
pressure due to the rise as highly efficient producers of first Japan and later Korea and other ‘Asian Tigers’. But
growth persisted until the mid-1970s, when the oil crisis (a sudden tripling of oil prices by the Organization of the
Petroleum Exporting Countries, OPEC), broke the growth cycle.

The ‘golden years’ between 1945 and 1975 also saw large institutional changes. The US directly after the war
initiated (via Marshall Aid) new forms of European cooperation, but these experiments took a more definite shape
with the 1957 Treaty of Rome, which established the European Economic Community (EEC). This was an
ambitious project to set up a customs union with harmonized external tariffs, with its own agricultural policy.
Belgium, France, the Netherlands and Luxembourg were among the six initial members of the EEC, which also
included Italy and the economic powerhouse Germany (Milward 1993). The UK preferred to remain outside, more
or less expecting an early collapse of the experiment. Ireland and the Scandinavian countries were more closely
linked to the UK, and became (with the exception of Finland), members of the alternative European Free Trade
Association (EFTA), a free-trade zone set up by the British. The more ambitious EEC model with its supra-national
institutions was more effective, however; the EFTA moreover lacked geographic coherence. In the 1960s the UK
twice tried to become a member of the EEC, finally succeeding (with Ireland and Denmark) in 1973.

The second dimension of institutional change was national. All countries saw, in varying degrees, the growth of
the welfare state. This was partly inspired by the bitter experience of the 1930s and by the new solidarity that
emerged during the war; the famous Beveridge report (1942) that created the basis for the British welfare state is a
case in point. The implementation of the measures proposed in this report by the new Labour government after 1945
is an example of the ‘new settlement’ that was realized in most north-western European countries after 1945
(Eichengreen 2007). After long battles between ‘capital’ and ‘labour’ a new compromise was reached, in which
‘capital’ agreed with the extension of social security and other welfare measures that labour had requested for long.
In many countries – Sweden, the UK, the Netherlands – the participation of social democracy in government was
part of the process. In the Netherlands, a policy of wage moderation was carried out by the government, and trade
unions and employers’ organizations worked together to implement it. The aim was to create employment for the
rapidly growing labour force.

These policies of international cooperation and national reform were successful: rapid growth was until the
mid-1970s combined with the rapid expansion of welfare services paid for by progressive taxes, resulting in a
dramatic decline of income inequality (again, until the mid-1970s). This ‘egalitarian revolution’ of the twentieth
century had already begun after 1913, but had by and large been the product of the two world wars and the Great
Depression, which had had strong levelling consequences (Piketty 2014). What was ‘unique’ between 1945 and
1975 is that rapid growth went together with an on-going fall in inequality. In previous periods of growth, inequality
had often increased, as for example profit income grew more rapidly than wage income. But 1945–75 was different;
rapid growth meant that unemployment fell to very low levels, and this labour scarcity drove up nominal and real
wages. Labour costs were also increased by the growth of social transfers, often linked to wage income. As a result,
from the early 1960s onwards, profits came under pressure, also due to increased international competition from
within Europe (thanks to the EEC) and from the global economy (the Asian Tigers). Companies responded by
increasing their exports (made possible by EEC trade liberalization), by stepping up investments to save on labour
costs and by raising prices (causing an acceleration of inflation). Given the tight labour market, more inflation only
led to further wage increases. For a while, declining profits did not ‘cool off’ the economy, but lead to a wage–price
spiral that became characteristic of the late 1960s and 1970s. In the Netherlands these symptoms of economic illness
were accompanied by an overvalued exchange rate, made possible by the large reserves of natural gas discovered in
the 1960s; it gave rise to the ‘Dutch disease’, which implied that manufacturing exports (and employment) were
crowded out by the easy gains from natural gas exports.

Such was the situation when the oil crisis struck. Its effect was to create a process of ‘stagflation’ – economic
stagnation combined with rapid inflation, a phenomenon not easily explained within the dominant Keynesian
paradigm. What had contributed to the hubris of the 1960s and 1970s is that policymakers (and economists) thought
that Keynesian demand management had solved the problem of how to stabilize the economy. Supply-side problems
were ignored, until the 1970s showed the limitations of the Keynesian ideas. There was in most countries a switch to
more liberal and/or monetarist economic policies. In the UK, where politics had an inbuilt tendency to switch from
one extreme to another, Margaret Thatcher’s rise to power in 1979 was the symbolic end of the postwar period in
which the British economy had become the ‘sick man’ of western Europe. Whereas directly after the war the UK
was still the wealthiest country of the region, in 1975 it had been overtaken by all other parts of north-western
Europe, with the exception of Ireland and Finland (and the margin with Finland was now reduced to a few per cent).
Thatcher’s diagnosis included that labour costs were too high and that declining high cost industries such as the coal
mines had to be closed down, which implied clashes with the powerful trade unions. More in general, the state had
to radically withdraw from attempts to regulate the economy, and the market had to take over. This neo-liberal
offensive became in various degrees typical of institutional developments until the early 2000s, when the financial
crisis of 2007–08 showed the weaknesses and limitations of this approach. Different countries participated
differently in the process: the Thatcherite offensive was probably most dramatic in the UK, although Ireland would
be a second candidate of a country most dramatically changed during these years (it also, finally, began to catch up
with the rest of Europe in these years, also thanks to the joining of the EU). On the continent changes were more
moderate – privatization and liberalization of markets did happen, but there was not the dramatic clash with the trade
unions, and the welfare states were only ‘streamlined’. During the Mitterand presidency (1981–95) France went
through a number of policy experiments, first inspired by left-wing ideas (resulting, for example in nationalization
of the big banks), and when this did not work out well, policy switched towards more neo-liberal ideas.

The contrasting developments of the welfare state was reflected in trends in income inequality: in the UK and
Ireland inequality increased strongly, whereas it more or less stabilized in the Low Countries and Scandinavia. The
EEC developed into the European Union (EU), and more interestingly, from an instrument of government
intervention (which is how it originated in the 1950s) into a body that furthered market-oriented reforms, such as the
creation of the common market in the early 1990s.

The 1970s–1990s saw a radical transformation of the economic structures of the region. Industrial growth had
been until the mid-1960s the engine of economic development, leading to a gradual decline of employment in
agriculture and a strong increase in industrial (and tertiary) activities (see for example Schön 2012). In the 1960s–
1980s this changed, however; industrial employment first stagnated, then started to fall. Services became the
dominant sector in the economy, employing up to 70–80 per cent of the labour force and supplying a more or less
equal share of GDP. Education, health care, banking and insurance and government services became the main
sources of employment growth, whereas the share of agriculture continued to fall (to less than 5 per cent of the
labour force). This transformation towards the postindustrial economy was already well underway when the impact
of the information and communications technology (ICT) revolution of the 1990s came to be felt. It further
stimulated the transition to a service-oriented economy, and revolutionized the way people did their work and
interacted in general. Banking was perhaps the sector that profited most from these changes and from the change in
the political climate which favoured free capital flows and markets, and increasingly sophisticated financial services.
The 1980s and 1990s saw a remarkable revival of the City of London as the largest financial centre outside the US.
It was part of a more general renaissance of the UK, which was also stimulated by North Sea oil, and the renewed
flexibility of this typical Anglo-Saxon economy after the Thatcher revolution. Norway, too, profited from the huge
oil reserves found in the North Sea, making possible its ‘Alleingang’ (separate path) outside the EU. The big boom
of the 1990s burst in two steps: the stock market boom driven by ICT companies that only rarely made a real profit,
also known as the ‘dot com bubble’, collapsed in 2001–02; the banking-sector boom driven by sophisticated but
highly untransparent financial instruments persisted until 2007 (see Highlight Chapter H1.1 on the debates about
banking regulation for which the London City banks were paradigmatic). The financial crisis that began in that year,
ended the long (thirty-year) period of growth according to the neo-liberal recipe.

North-western Europe has been among the most successful parts of the world economy, as pioneers of the market
economy and Smithian economic growth, being the first region to break through the Malthusian ceiling, and as the
leading region to develop the industrial society that came to dominate the world economy after 1800. This long-term
success was founded on endogenous institutions and on the acquisition of a central place in the world economy that
emerged after 1600. Growth, initially concentrated in the Low Countries and Great Britain, after 1800 also spread to
the rest of the region, and France and the Scandinavian countries (and more recently also Ireland) achieved welfare
levels which are among the highest in the world.


1. Clearly, the French Revolution and the Napoleonic Wars also reduced incomes per capita, but this could have
been a temporary influence on GDP per capita.

Further reading

Allen, R. C. (2009), The British Industrial Revolution in Global Perspective, Cambridge University Press; a very
accessible interpretation of the British Industrial Revolution.

de Vries, J. and van der Woude, A. (1997), The First Modern Economy: Success, Failure, and Perseverance of the
Dutch Economy, 1500–1815, Cambridge University Press; still the best book on the pre-1800 development of the

Eichengreen, B. (1992), Golden Fetters: the Gold Standard and the Great Depression, 1919–1939, Oxford
University Press; is still fundamental for the interwar period.

Eichengreen, B. (2007), The European Economy since 1945: Coordinated Capitalism and Beyond, Princeton
University Press; for the post-1945 ‘new settlement’.

Pollard, S. (1981), Peaceful Conquest: the Industrialization of Europe, 1760–1970, Oxford University Press; still
useful representing the huge literature about industrialization processes in various parts of the region.

van Zanden, J. L. and van Riel, A. (2004), The Strictures of Inheritance. The Dutch Economy in the Nineteenth
Century, Princeton University Press; covers the atypical experience of the Netherlands.


Acemoglu, D., Cantoni, D., Johnson, S. and Robinson, J. (2011), ‘The Consequences of Radical Reform: the French
Revolution’, American Economic Review 101 (4) 3286–307.

Acemoglu, D., Johnson, S. and Robinson, J. (2005), ‘The Rise of Europe: Atlantic Trade, Institutional Change and
Growth’, American Economic Review 95 (3), 546–47.

Allen, R. C. (1992), Enclosure and the Yeoman. The Agricultural Development of the South Midlands, 1450–1850,
Oxford: Clarendon Press.

Allen, R. C. (2001), ‘The Great Divergence in European Wages and Prices’, Explorations in Economic History 38,

Baten, J. and Blum, M. (2014a), ‘Why are you Tall while Others are Short? Agricultural Production and other
Proximate Determinants of Global Heights’, European Review of Economic History 18, 144–65.

Benedict, P. (1996), ‘Un roi, une loi, deux fois: parameters for the history of Catholic-Reformed co-existence in
France, 1555–1685’, in O. P. Grell and B. Scribner, Tolerance and Intolerance in the European Reformation,
Cambridge University Press, pp. 65–93.

Bolt, J. and van Zanden, J. L. (2014), ‘The Maddison Project. Collaborative Research on Historical National
Accounts’, The Economic History Review 67 (3), 627–51.

Broadberry, S. N. (1984), ‘The North European Depression of the 1920s’, Scandinavian Economic History Review
32 (3), 159–67.

Broadberry, S., Campbell, B., Klein, A., Overton, M. and van Leeuwen, B. (2011), ‘British Economic Growth,
1270–1870: an Output-based Approach’, Studies in Economics 1203, Department of Economics, University of Kent.

de Moor, T. and van Zanden, J. L. (2010), ‘Girl Power: the European Marriage Pattern and Labour Markets in the
North Sea Region in the Late Medieval and Early Modern Period’, Economic History Review 63 (1), 1–33.

Hjerppe, R. (1989), The Finnish Economy 1860–1985: Growth and Structural Change. Studies on Finland’s
Economic Growth XIII. Helsinki: Bank of Finland Publications.

Hoffman, P. T. (2003), ‘France: Early Modern Period’, in J. Mokyr (ed.), The Oxford Encyclopedia of Economic
History, Oxford University Press, 363–66.

Komlos, J. (1998), Shrinking in a Growing Economy? The Mystery of Physical Stature during the Industrial
Revolution, The Journal of Economic History 58 (3).

Maddison, A. (2001), The World Economy: a Millennial Perspective, Paris: OECD Publishing.

Marshall, M., Jaggers, G. K. and Gurr, T. R. (2011), POLITY IV Project Political Regime Characteristics and

Transitions, 1800–2010 Dataset Users’ Manual,, last
downloaded 1 September 2014.

Milward, A. (1993), The European Rescue of the Nation State, London: Routledge.

Mokyr, J. (2002), The Gifts of Athena. Historical Origins of the Knowledge Society, Princeton University Press.

O’Grada, C. (1995), Ireland: a New Economic History, 1780–1939, Oxford: Clarendon Press.

O’Rourke, K. H. and Williamson, J. G. (1999), Globalization and History: the Evolution of a Nineteenth-century
Atlantic Economy, Cambridge, MA: MIT Press.

Piketty, T. (2014), Capital in the 21st Century, Cambridge, MA: Harvard University Press.

Schön, L. (2012), An Economic History of Modern Sweden, Abingdon: Routledge.

Tracy, M. (1989), Government and Agricultural Protection in Western Europe, 1880–1988, New York: Harvester.

van Zanden, J. L., Buringh, E. and Bosker, M. (2012), ‘The Rise and Decline of European Parliaments, 1188–1789’,
Economic History Review 65 (3), 835–61.

van Zanden, J. L., de Moor, T. and Zuijderduijn, J. (2012), ‘Small is Beautiful: the Efficiency of Credit Markets in
late Medieval Holland’, European Review of Economic History 16 (1), 3–22.

van Zanden, J. L. and van Leeuwen, B. (2012), ‘Persistent but not Consistent: the Growth of National Income in
Holland, 1347–1807’, Explorations in Economic History 49 (2), 119–30.

Voigtländer, N. and Voth, H.-J. (2012), ‘How the West “Invented” Fertility Restriction’, National Bureau of
Economic Research (NBER) Working Papers w17314.


The great divergence in the world economy: long-
run trends of real income

Stephen Broadberry

The origins of the economic divergence between countries that we observe today can be traced back to the early part
of the last millennium, thanks to recent work on historical data. This chapter discusses the roots of the great
divergence between European and Asian economies. Divergence is due to the differential impact of shocks that hit
economies with different structural features.

As a result of recent work, economic historians have produced historical national accounts reaching back to the
early years of the second millennium, derived from data collected at the time. For the major European economies, at
least, data are now available on an annual basis back to 1300.

Measuring the great divergence: Maddison revised
This new work presents quite a different picture of the development of European and Asian nations from that
surmised by Angus Maddison in his widely used book, The World Economy: a Millennial Perspective, where pre-
1820 estimates of per capita GDP were based largely on conjecture, and provided only for a small number of
benchmark years.

As it turns out, medieval and early modern European and Asian nations were much more literate and numerate
than is often thought. They left behind a wealth of data in documents such as government accounts, customs
accounts, poll tax returns, parish registers, city records, trading company records, hospital and educational
establishment records, manorial accounts, probate inventories, farm accounts and tithe files. With a national
accounting framework and careful cross-checking, it is possible to reconstruct population and GDP back to the
medieval period. The picture that emerges is one of reversals of fortune within both Europe and Asia, as well as
between the two continents.

This means that the great divergence of living standards between Europe and Asia had late medieval origins
and was already well under way during the early modern period, contrary to the recent revisionist views of writers
such as Kenneth Pomeranz. However, the revisionists are correct to point to regional variation within both
continents. Figure I1.1 shows the European little divergence, or reversal of fortunes between the North Sea area and
Mediterranean Europe, as Britain and Holland began to catch up with Italy and Spain from 1348 – and then forged
ahead from 1500 – led first by the Dutch Golden Age, and later by the British Industrial Revolution.

Figure I1.1 Real GDP per capita in European countries, 1270–1870 (1990 international dollars, log scale)

Sources: Álvarez-Nogal and de la Escosura 2013, Bassino et al. 2014, Broadberry et al. 2011, 2014, 2015a,

2015b, Broadberry and van Leeuwen 2011, Malanima 2011, van Zanden and van Leeuwen 2012.

Putting together the GDP per capita data for these key European economies, with data on a number of
important Asian economies in Table I.1, suggests also an Asian little divergence, with Japan overtaking China and
India. However, Japan started at a lower level of per capita income than Britain and Holland and grew at a slower
rate, so continued to fall behind until after the Meiji Restoration of 1868. Thus the two continents diverged as
reversals of fortune occurred within each continent. This picture is not changed dramatically if allowance is made
for regional variation within China. Li and van Zanden (2012) estimate GDP per capita in China’s richest region, the
Yangzi Delta, compared to the Netherlands in the 1820s. This suggests that the Yangzi Delta had a per capita GDP
of around $1,000 in 1990 international prices, which is only slightly higher than in Japan, and about the same level
as in Spain.

Table I.1 GDP per capita levels in Europe and Asia (1990 international dollars)

England/GB Holland/NL Italy Spain Japan China India

725 551

900 476

980 1,247

1020 1,518

1050 1,458

1086 754 1,204

1120 1,063

1150 508

1280 679 957 552

1300 755 1,482 957

1348 777 876 1,376 1,030

1400 1,090 1,245 1,601 885 960

1450 1,055 1,432 1,668 889 552 983

1500 1,114 1,483 1,403 889 1,127

1570 1,143 1,783 1,337 990 968

1600 1,123 2,372 1,244 944 605 977 682

1650 1,110 2,171 1,271 820 619 638

1700 1,563 2,403 1,350 880 597 841 622

1750 1,710 2,440 1,403 910 622 685 573

1800 2,080 1,752 1,244 962 703 597 569

1850 2,997 2,397 1,350 1,144 777 594 556

Sources: Álvarez-Nogal and de la Escosura 2013, Bassino et al. 2014, Broadberry et al. 2011, 2014, 2015a,
2015b, Broadberry and van Leeuwen 2011, Malanima 2011, van Zanden and van Leeuwen 2012.

Notes: The British data refer to the territory of England before 1700 and Great Britain thereafter; the Dutch data
refer to the territory of Holland before 1800 and the Netherlands thereafter. Data for all countries except Japan and
India are for ten-year averages starting in the year stated (e.g., 1300 = 1300–09).

Explaining the great divergence: shocks with asymmetric effects
Economic historians can now, therefore, account for the great divergence, using the word ‘accounting’ in the sense
of measurement – by providing a quantitative picture of when and where the great divergence occurred. However,
there is a second sense in which the word ‘accounting’ can be used – to provide an explanatory narrative.

Much remains to be done on the measurement of the key explanatory factors, but the framework adopted here
is to see the divergences as arising from the differential impact of shocks hitting economies with different structural
features. The economic history literature suggests two important shocks coinciding with the turning points identified
above around 1348 and 1500.

These shocks had asymmetric effects on different economies because of four important structural factors.

The Black Death – which began in western China before spreading to Europe and reaching England in 1348
– wiped out around one-third of Europe’s population within three years, and more than a half over the
following century.

Around 1500, new trade routes were opened up between Europe and Asia around the south of Africa, and
between Europe and the Americas.

The type of agriculture.

The age of first marriage for women.

The flexibility of labour supply.

The nature of state institutions.

The effects of the Black Death
The Black Death of the mid-fourteenth century had quite different effects in different parts of Europe. The classic
Malthusian response to such a mortality crisis is a rise in incomes for those lucky enough to survive because of an
increase in the per capita endowment of land and capital for survivors.

However, as population recovers, it should lead to a corresponding decline in per capita incomes.

Here, population decline destroyed commercial networks and further isolated an already scarce population,
reducing specialization and the division of labour, so that Spain did not share in the general west European increase
in per capita incomes.

This happened in Italy, but not in Britain or Holland, as a result of the high age of marriage of females
(linked to labour market opportunities in pastoral agriculture) and people working more days per year (the
industrious revolution).

The situation was different in Spain, which was a land-abundant frontier economy during the Reconquest,
and, hence, did not see a rise in per capita incomes following the Black Death.

There are no signs of a positive Black Death effect in Asia, since Japan remained isolated, so that the disease
never took root, while the period was marked in China by the Mongol interlude, which destroyed the
institutional framework that had underpinned the high per capita incomes of the Northern Song dynasty.

New trade routes
The opening up of new trade routes from Europe to Asia and the Americas accelerated the process of divergence,
again through their interaction with structural features of the different economies. It might be expected that Spain
and Portugal would have been the gainers from these changes, since they were the pioneers and both had Atlantic, as
well as Mediterranean coasts. However, early modern Britain and Holland dominated Spain and Portugal in terms of
institutional structures, including both the ability of states to raise taxes to finance the expansion of state capacity
(needed for the effective enforcement of property rights), and the control exercised by mercantile interests over the
state through parliament (needed to limit arbitrary intervention in business affairs by rulers).

China adopted a restrictive closed-door policy towards long-distance trade after the ‘voyages to the western
oceans’ that had occurred between 1405 and 1433, which had shown China to be technologically ahead in
shipbuilding. However, following an initial period of openness to relations with European traders, Tokugawa Japan
adopted a policy of seclusion from the 1630s, so any Japanese advantage from the earlier Chinese turn inwards was

Although recent work has tended to question the extent to which trade really was closed off by these policies,
the contrast with the outward orientation of the European states which sponsored the voyages of discovery from the
fifteenth century remains striking. With early modern China and Japan turned inwards, India was the Asian country
most open to trade, with its major export business in cotton textiles. However, this did not lead to Indian prosperity
because of the low levels of state capacity and its consequences for the enforcement of property rights.


Álvarez-Nogal, C. and de la Escosura, P. (2013), ‘The Rise and Fall of Spain (1270–1850)’, Economic History
Review 66, 1–37.

Bassino, J. P., Broadberry, S., Fukao, K., Gupta, B. and Takashima, M. (2014), ‘Japan and the Great Divergence,
725–1874’, London School of Economics.

Broadberry, S., Campbell, B., Klein, A., Overton, M. and van Leeuwen, B. (2011), ‘British Economic Growth,
1270–1870: an Output-based Approach”, London School of Economics.

Broadberry, S., Campbell, B., Klein, A., Overton, M. and van Leeuwen, B. (2015a), British Economic Growth,
1270–1870, Cambridge University Press.

Broadberry, S., Custodis, J. and Gupta, B. (2015b), ‘India and the Great Divergence: an Anglo-Indian Comparison
of GDP per capita, 1600–1871’, Explorations in Economic History 56, 58–75.

Broadberry, S., Guan, H. and Li, D. (2014), ‘China, Europe and the Great Divergence: a Study in Historical National
Accounting”, London School of Economics.

Broadberry, S. and van Leeuwen, B. (2011), ‘The Growth of the English Economy, 1086–1270”, London School of

Li, B. and van Zanden, J. L. (2012), ‘Before the Great Divergence? Comparing the Yangzi Delta and the
Netherlands at the Beginning of the Nineteenth Century”, Journal of Economic History 72, 956–89.

Malanima, P. (2011), ‘The Long Decline of a Leading Economy: GDP in Central and Northern Italy, 1300–1913’,
European Review of Economic History 15, 169–219.

van Zanden, J. L. and van Leeuwen, B. (2012), ‘Persistent but not Consistent: the Growth of National Income in
Holland, 1347–1807’, Explorations in Economic History 49, 119–30.


International financial regulation and supervision

Catherine Schenk

The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire.

(The Financial Crisis Inquiry Report, US Congress, 2011)

The global financial crisis of 2007/08 seemed to reveal a phenomenal lack of prudence by bankers, who bought and
sold risky assets that they did not fully understand, and by regulators, who let banks operate in ways that risked the
stability of the global financial system. The result was costly state bail-outs of banks in many countries and years of
restricted lending as banks restored their damaged balance sheets. Renewed effort at regulatory reform has increased
interest in the historical development of banking and banking regulations. Reinhart and Rogoff (2009) catalogued
the high frequency of financial crises over the past 800 years and emphasized the dangers of ignoring the historical
record. Calomiris and Haber (2014) argued that deals among regulators, politicians and special interests produced
ineffective regulations. Banking crises are not randomly distributed; they are the result of regulatory systems that
arise from specific historical contexts.

The relationship between regulators and the regulated has attracted considerable academic attention. The
importance of banks to economic stability and growth makes a strong case for external prudential supervision; but
information asymmetry, complexity, the speed of innovation and the high value of private information to banks
often prevent transparent prudential supervision. These difficulties are magnified on the international level. Because
national banking systems are fundamental to macroeconomic policy, their supervision is a jealously guarded
prerogative of national regulators. However, the highly integrated nature of national banking systems, the
vulnerability to cross-border contagion and the need to avoid regulatory competition (to the bottom) provides a
strong rationale for some form of multilateral oversight.

In the postwar years, capital controls insulated national systems from contagion as governments sought to
protect their national policy sovereignty. National systems of regulation became entrenched as part of the
international monetary system designed at Bretton Woods that prioritized policy sovereignty and stable exchange
rates over free flows of capital. Central banks focused on the balance of payments while their governments sought to
restore national prosperity. By the 1960s, however, this framework was under threat from financial innovation. The
offshore Eurodollar market attracted global banking to the City of London in an unregulated market condoned by the
Bank of England. The increasingly international networks of banks exposed the inconsistencies between national
regulatory systems. In particular, the international operations of the City of London were relatively lightly regulated,
in contrast to tighter controls in New York. The result was a flood of American banks into London to take advantage

of the offshore market. In the early 1970s, this left the system vulnerable to a series of shocks including newly

floating exchange rates and commodity price shocks.
The most ambitious attempt to develop robust international banking regulation was the Basel Committee,

launched at the Bank for International Settlements in 1975. The failure and near-failure of several banks in the
summer of 1974 exposed the risk of gaps in prudential supervision, inconsistent practice in foreign exchange
markets and interdependencies between national banking systems that required a fresh approach. The Basel
Committee shared best practice and tried to devise a framework to ensure common regulatory oversight of branches
and subsidiaries as well as parent institutions (Goodhart 2010). Over the next thirty-five years the Basel Committee
became the main forum for negotiated common standards and regulation. After the sovereign debt crisis of 1982/83
threatened to bring down the international banking system, the Basel Committee spent years negotiating capital
adequacy standards with the world’s banks.

This did not forestall another series of financial crises in emerging markets in the 1990s. This crisis prompted a
fresh round of negotiated standards, but failed to forestall the imprudent practices that led to the 2008 global
financial crisis. Despite the efforts at Basel, the entrenched protection of national sovereignty over regulating the
banking system has meant that banking regulation remains national while the industry became increasingly global.
This mismatch lies at the root of the vulnerability to contagion from one national system to another. The collapse of
Lehman Brothers in September 2008 was the outcome of a debate about immediate American interests, but it had
disastrous effects as Lehman’s global network sucked liquidity out of the international financial system. The history
of international banking and financial regulation emphasizes the importance of the institutional context in which
regulations are developed, the dangers of regulatory capture because of the specific characteristics of financial
institutions and the perils of regulating a global industry through national frameworks.


Calomiris, C. W. and Haber, S. H. (2014), Fragile by Design: the Political Origins of Banking Crises and Scarce
Credit, Princeton University Press.

Goodhart, C. (2010), The Basel Committee on Banking Supervision: a History of the Early Years, Cambridge
University Press.

Reinhart, C. M. and Rogoff, K. S. (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton
University Press.


Southern, eastern and central Europe

Joerg Baten

European countries and regions have followed many different paths to modernity. How were some countries able to
achieve significant development accelerations during some periods? Why did living standards in these countries
regress during other periods? This chapter focuses on the countries of eastern, southern and central Europe.

The core events of the Industrial Revolution have attracted much attention; however, because these events
occurred in England and Scotland, many countries between Portugal and Russia have received less coverage in
economic history books. This lack of research is astonishing because the history of these countries is exciting. In
fact, it may seem to the historian that these regions were racing towards higher standards of living. There was
considerable change over time in which the region was ahead in this race. For example, southern Europe clearly led
in productive capacity and education during the late medieval and early modern periods. Recent studies indicate that
the national incomes of Spain and Italy were higher than that of the UK in 1500 and that Italy had higher educational
levels. Spain was likely also a world leader in quasi-parliamentary participation during the Middle Ages (van
Zanden et al. 2012). Hence, skilled workers during this period migrated from north to south, especially to Italy, not
the other way as some workers migrate today.

Figure 2.1 presents the human capital development of three European regions (north-west, south and east)
between 1450 and 1800. Because educational indicators, such as school enrolment and literacy, are unavailable for
all countries during this early period, we use the following basic numeracy indicator: the share of people who were
able to report their own age correctly (in years).1 The eventual human capital leadership of north-western Europe
was not a given during the late fifteenth century. Rather, southern Europe exhibited higher levels of numeracy than
the rest of Europe. Only after the beginning of the sixteenth century was human capital higher in north-western
Europe. In general, Europe experienced a human capital revolution between 1450 and 1800. The increase in
numeracy from approximately 50 per cent to nearly 100 per cent represents a difference as large as that existing
between rich and poor countries during the early twentieth century.

Figure 2.1 The human capital revolution in European regions (numeracy, fifteenth to eighteenth centuries)
Notes: ‘1450’ refers to persons born in 1450–99, etc. We included all countries for which longer series or at least
early values were available: ‘north-west’ includes the UK, Netherlands and protestant Germany; ‘south’ is Italy
(north); ‘east’ is the average of Russia, Bohemia and Austria. When values between benchmark dates were
missing, they were interpolated. Weak estimates were omitted. For the UK and the Netherlands before 1600, the
benchmark year of UK 1600 was used and the changes from Germany (Protestant).

Source: based on A’Hearn et al. (2009).

The predominance of southern Europe during earlier periods is confirmed by estimates of national income
(Figure 2.2). Until the end of the fifteenth century, Italy outperformed both England and Holland and, until the late
seventeenth century, it continued to outperform the former. While Spain was richer than north-western Europe
during the Middle Ages, this southern European country had been surpassed by 1400.2 Between 1500 and 1700,
north-western Europe experienced significant increases in national income, eventually overtaking Italy.

Figure 2.2 Early GDP per capita development
Notes: Real GDP in dollars. The British data refer to the territory of England before 1700 and Great Britain
thereafter; the Dutch data refer to the territory of Holland before 1800 and the Netherlands thereafter. Data for all
countries except Japan and India are for ten-year averages starting in the year stated (e.g., 1300 = 1300–09).

Source: based on Broadberry et al. 2014.

In the following, we will first discuss the interesting cases of exceptionally high standards of living in Poland
during the late sixteenth century, and the equally surprising high human capital and income levels in Italy during the
same period. Afterwards, the reasons of their relative decline are studied. To put these cases in perspective, we then
consider all regions of southern, eastern and central Europe in a cross-sectional comparison, and we report their
development level around 1800. During the late nineteenth century, central Europe overtook the east and south
economically, but it became also the epicentre of the political and military catastrophes of the early twentieth
century. The history of this large part of Europe during the twentieth century is traced in the last part of this chapter,
concluding with the transformation of the east from socialism to market economy, and the world economic crisis of
the late 2000s that hit southern Europe particularly harshly.

Why did Italy lead during the early modern period?
The economic history of the Italian peninsula illustrates both the high initial level of development in the South as
well as its slower growth from the seventeenth to early twentieth centuries compared to north-western and central
Europe. The Italian Renaissance was not only astounding in the arts but also in economic development. The
economic pioneers were Venice and Genoa. What caused the early development of cities such as Venice and Genoa?
Many reasons can be considered, such as the relative military safety of Venetian lagoons and the high population
density and urbanization of the Italian peninsula. Acemoglu and Robinson (2012) recently argued that the early
development of broader political participation in Venice created an institutional structure in which inspired and
talented entrepreneurs had opportunities to succeed. In contrast, in many other European cities, established wealthy
merchants excluded newcomers, generating impediments to overall city development. Venice also developed early
versions of joint stock capital firms (Acemoglu and Robinson 2012). Typically, two (or more) merchants created a
trading enterprise. One merchant was responsible for long-distance transport, while the other provided financing for
the enterprise. The famous explorer Marco Polo became an idol of Venetian merchants and other traders in many
parts of the world.

Early merchant development paralleled banking activity in Tuscany, first in Siena and Lucca and later in
Florence and beyond. Following the early rise of banking and trade, Tuscany developed a highly successful and
skill-intensive textile industry. North-central Italian manufacturers began by adding ornaments to Flemish textiles.
Soon, they developed new technologies and outperformed the north-west European producers. During the
seventeenth and eighteenth centuries, however, the pendulum swung back. Figures 2.1 and 2.2 suggest two main
developments. First, southern Europe experienced a gradual but steady decline in relative economic standing;
second, the economic dominance of north-western Europe during the eighteenth century – measured by income per
capita – was preceded by a significant increase in human capital in this region during the previous two centuries.

What factors were responsible for slower Italian development? A number of factors produced a relative decline
in national income and education levels in Italy and the southern European region. Military conflicts, often initiated
by foreign powers such as Germany, Spain or France, were traditionally considered driving events of this shift in
living standards. In addition, political fractionalization in Italy reduced the ability to defend all city-states and
medium-sized principalities. Fiscal capacity was also limited, which otherwise could have facilitated hiring soldiers
for defence (Dincecco 2011). A second important factor was the shift of world trade to north-western Europe. While
Italian merchant ships had been most active in Mediterranean, Middle Eastern and North African ports, in the
seventeenth century, the Dutch and English dominated merchant shipping and the Italians were disconnected from
new international trade routes. Alfani (2013) argued that the seventeenth century plague affected Italy much more
than other European countries. Therefore, this relatively exogenous event might have contributed to the relative
decline of Italy. Finally, the institutional developments that occurred in north-western Europe were more beneficial
than those in the southern European countries. Merchants in Amsterdam and London developed new ideas and
exploited new economic opportunities and they could be relatively certain that greedy rulers would not expropriate
their returns. In contrast, Venice became an aristocratic oligarchy in which rich families excluded new entrepreneurs
and hindered further socio-economic development (Acemoglu and Robinson 2012).

Standards of living in early modern east-central Europe
Interestingly, east-central Europe enjoyed a surprisingly high standard of living during the late sixteenth and early
seventeenth centuries. Compared to Italy, this high standard of living was not so much a result of the high incomes
of merchants and highly skilled workers but the relatively healthy lives of unskilled urban workers and some farmer
groups. Measures such as real wages and human stature are indicators of human welfare. Height is an indicator of
health and nutrition, which is particularly well suited to measuring the welfare of lower income groups and farmers.3

Eastern European males during the sixteenth century were, on average, taller than their southern and northern
European counterparts; eastern Europeans were an average of 171.4 cm tall, while the British, southern Germans,
and Dutch/west Germans measured 170.4 cm, 169.3 cm and 170.0 cm, respectively (Koepke and Baten 2005, 2008).
This height evidence supports the idea of an east-central European golden age of around 1600.

Recent research by Malinowski (2013) notes that if real wages are measured for both urban and rural areas, real
wages in Poland were comparable to those in England c. 1600 (whereas for earlier and later periods, England’s
wages were higher). Earlier scholars would not have anticipated this level of income in east-central Europe.4

How did east-central Europe maintain relatively high standards of living even for lower income groups? In
general, eastern Europe was characterized by low population density during the late medieval period. The local
rulers encouraged migration into this area, attracting new settlers by offering relatively favourable conditions. This
included also skilled Jewish immigration. During the sixteenth century, this situation began to deteriorate for
peasants, but the level of nutrition and health was still relatively high, which can be observed using the indicators
discussed above. In addition, during the sixteenth century, Polish kings were constrained by the Polish parliament.
Although this parliament consisted mainly of landed nobility and did not necessarily pursue the general welfare,
constraints on the executive produced some positive effect during the sixteenth century (for a different view, see
Malinowski 2014). For example, the parliament sometimes prevented the king from engaging in costly military
adventures. The sixteenth century also produced the Polish Renaissance, which included the construction of
remarkably beautiful buildings.

In contrast, during the seventeenth and eighteenth centuries, the government became more extractive. Rent-
seeking of the landed nobility characterized national policy. The seventeenth century was also a period of war,
epidemic diseases and increasing exploitation of peasants. During the so-called second serfdom, large landowners
required increasing labour days from peasants who were often required to postpone their own harvests, which bad
weather had often already partially destroyed. The second serfdom began in the sixteenth century but its negative
effects became more visible during the seventeenth century. The most detrimental military events during this period
were civil wars of 1605–06 and 1666.

In addition, nutrition and health worsened during the seventeenth century because more grain was demanded
and consumed outside of the country. Notably, Polish grain was exported to western Europe (on the trade of grain
and silver, see Map 2.1). A portion of the high nutritional status of this country was exported to north-western
Europe in exchange for industrial goods of which the nobility consumed a large share.

Map 2.1 Trade of grain and silver in Europe during the sixteenth century

Redrawn and modified after Knaurs historischer Weltatlas, ed. by G. Barraclough. Knaur 2000.

What was the situation in Russia? During the early-modern period, the principality of Moscow developed into a
large territorial state that included much of what is today European Russia. Despite its rapid growth – the
principality had one of the highest geographic expansion rates in the world – it was a state facing permanent military
challenges: the Polish and Swedish threatened from the west, the Crimean Tatars and Ottomans from the south, and
pastoral tribes from the east (Bibikov 2013). Moscow structured its economy according to its military aims; the
harvests of both government-owned land (pomest’e) and private, inheritable land (votchina) were used to support the
army. All harvest returns that exceeded the basic subsistence of farmers were consumed by the Russian military.
Russia was almost exclusively agricultural; approximately 2 per cent of the population was included in each of the

following three groups: townsmen, clergy and military/administrative. Approximately 5–10 per cent of the
population was slaves, mostly in households. The second serfdom gained momentum in Russia after the government
prohibited peasant mobility in 1592.

This difficult situation had important implications for Russia’s development. Estimates of national income
based on real evidence are not yet available, but Mironov´s estimates of human stature suggest that even in the
eighteenth century, Russians had relatively low nutritional statuses despite usually beneficial land–labour ratios
(Mironov 2012). Additionally, numeracy estimates are low for the seventeenth and eighteenth centuries, although
there is some regional variation. Only during the mid-nineteenth century did Russia experience a human capital
revolution and substantial modernization of its economy (on the modernization of the legal system, see Highlight
Chapter 2.2).

Regional development during the early nineteenth century
After highlighting some of the tectonic shifts in development between the sixteenth and the eighteenth centuries,
focusing on Italy, Poland and Russia, we will now examine regional differences around 1800. Substantial variety in
economic development existed among regions. Even today, after decades of political attempts to improve standards
of living in poorer regions within Europe, these differences persist. For example, if a person is born in Sicily instead
of Milan or in Andalusia rather than in Barcelona, their life will typically be quite different. Did development
differences among regions characterize earlier periods, such as the nineteenth century? Can we identify some
important determinants of early regional differences that are persistent until today?

Unfortunately, some of the usual development indicators are unavailable to describe regional differences during
the early nineteenth century, such as regional gross domestic product (GDP), real wages or life expectancy
estimates. These indicators have been assessed regionally for some countries, but not for many, and not generally
using a common method of measurement. However, one important development indicator is available for many
European regions: numeracy. This important component of education has been estimated based on regional census
records for many European regions (Map 2.2). Because education is one of the three components of the Human
Development Index (HDI) – income and health are the other two – we will consider this indicator in detail.
Education in general and maths skills in particular are important predictors of income during later periods, and this
indicator is relevant to the income component of the HDI. The map of European regions indicate that Italy was
already divided by the early nineteenth century; numeracy was substantially lower in southern Italy. This finding is
also important in the light of arguments that the differences increased after Italian unification in the late nineteenth
century (Vecchi 2011).

Map 2.2 Numeracy in European regions

Source: Redrawn and modified after Hippe and Baten (2012).

Before we discuss the other European regional differences, we describe potential influences of numeracy. What
caused some regions to be less numerate? One important variable that has been identified in previous research is
land inequality. In many regions with high land inequality, powerful elites prevented the public financing of primary
education, especially if these elites were primarily involved in agriculture. From the perspective of the landed elite,
why should one sacrifice income via taxation for the schooling of poor day labourers who performed mostly manual
tasks on one’s estate? Even if such a willingness to sacrifice income had existed, labourers who are more educated
might threaten land reform or socialist revolution that would eventually reduce elite land and status.

Another factor that can influence the development of numeracy is educational policy and the willingness of the
government to invest in education. For example, the Ottoman Empire spent relatively small amounts of public funds
on education; in 1860–61, education represented only 0.2 per cent of the total budget. The Russian Empire also
lagged in educational development, but some effort was made after the Crimean War was lost. Other possible
determinants of human capital, such as proximity to trading ports, personal status (for example serfdom) and
religion, can also be important.

The Russian Empire was characterized by marked regional differences (Map 2.2). During this period, it
included the Baltic region with its Hanseatic heritage of trade in the urban centres.5 Numeracy was higher in the
Estonian and Latvian parts of the Russian Empire, which might have been influenced by the Protestant religion of
the inhabitants (Bible reading was required of all Protestants; see Becker and Woessmann 2009). The western and
central portions of the Russian Empire specialized in grain.6 Interestingly, numeracy was higher in north and north-
east Russia than in central Russia and Belarus (Hippe and Baten 2014). The improved legal position and less
oppressive serfdom and superior economic situations of frontier farmers in more recent settlements also contributed
to numeracy. In addition, in central Russia and Belarus, land inequality was particularly high. This pattern suggests
that land inequality is an important variable.

During the early nineteenth century, the Habsburg Empire included modern Hungary, Austria, Czech Republic
and Slovakia as well as parts of Poland, Italy, Romania and the former Yugoslavia.7 The western portion of the
Habsburg Empire was characterized by the highest level of numeracy; however, the Empire was generally
characterized by substantial variation. Hippe and Baten (2014) explained these differences by examining the
predominance of large estates in some regions.

Among the lowest levels of numeracy are observed in southern Balkan countries, which were long occupied by
the Ottoman Empire.8 This Middle Eastern Empire invested a particularly small share of its budget in education
because they viewed education as the responsibility of Islamic schools (for Muslims) or the local initiatives (for
other religions). The Ottoman Empire was also characterized by a very low capacity to raise taxes, and the small
central budget was spent on the military and government bureaucracies (Karaman and Pamuk 2010). Numeracy,
school enrolment and literacy rates were all low in countries under Ottoman rule. In some countries, these low levels
of human capital level persisted sometime after Ottoman rule ended.9 Greece and Cyprus likely faced the same
issues of paths taken under Ottoman educational policies (Figure 2.3). In these two countries, numeracy increased
rapidly during the twentieth century.10

Figure 2.3 Numeracy in selected Balkan and Caucasus countries
Note: we include here countries that were previously parts of the Ottoman or Persian Empire.

Source: based on data from Crayen and Baten (2010).

Two countries in the Caucasus interacted intensively with both the Ottoman and Persian Empires: Armenia and
Georgia. During the early modern period, these countries were mostly governed by the Persian or Ottoman Imperial
forces, although their principalities were sometimes granted semi-autonomous status. During the eighteenth century,
Russian territorial expansion included this part of the Caucasus. Given their common Christian religion, local
populations sometimes hoped to improve their status under Russian rule. The Russian Empire gradually conquered
these two countries during the late eighteenth and nineteenth centuries.11 Numeracy was relatively low, which might
partly be a consequence of Ottoman and Persian educational policies that only gradually improved during the
Russian period.

Both Italy and Spain were characterized by strong north–south differences in human capital (Map 2.2). The
southern parts of these countries, which specialized in grain production, were characterized by low numeracy and
particularly high land inequality.12 North-western Italy experienced renewed industrial growth centred on the
industrial triangle of Genoa, Milan and Turin. The traditional specialization of Spain was the wool produced in the
central Meseta region, which declined during the early nineteenth century. In Catalonia, a cotton textile industry
developed after the late eighteenth century.13

In central Europe, the industrial share was higher in some regions, although agriculture continued to dominate
during the early nineteenth century.14 The industrial centres were located in the Rhineland, the developing Ruhr area
and Silesia, with a focus on iron, mining, machinery, tools and textiles (especially during the early period). Among
the central European countries, Switzerland was characterized by a long tradition of clock making and, as in much of
central Europe, textiles. Numeracy was quite high during the early nineteenth century everywhere in central Europe.

Overall, the European region between Portugal and Russia displayed substantial differences in human capital
formation during the early nineteenth century. There was some interaction between agricultural structure and
education because regions characterized by large estates developed less human capital. Land inequality explains a
substantial part of the differences. However, cultural and institutional influences also had an effect, which the
opposite effects of the legacies of the Hanse League and Ottoman Empire demonstrated.

The nineteenth and twentieth centuries: an overview
Before considering development during the nineteenth and twentieth centuries in detail, we first provide an
overview and consider core indicators, such as GDP, health and education, for the regions of (1) eastern, (2)
southern and (3) central Europe.15 Figure 2.4 indicates GDP per capita over the last 200 years. At the beginning of
the nineteenth century, Italy dominated the other three countries considered as examples (Germany, Austria and
Portugal). However, during the late nineteenth century, central European economies grew quickly, and growth
outperformed that of southern Europe. This was the period of the second Industrial Revolution, and human capital
was a decisive factor in determining who won or lost this race. Other factors that played a role were access to trade
routes, institutional quality and fiscal capacity to build infrastructure.

Figure 2.4 GDP per capita during the last 200 years for selected countries


Southern Europe did not participate to the same degree in this second Industrial Revolution and began to trail
central and northern Europe. However, southern Europe began to catch up after the Second World War. Even
Portugal, which was the poorest country during this period, left the category of average world income behind and
converged to that of the richest countries.

Figure 2.5 displays the economic development of the European regions during the last 200 years. During the
period 1800–1900, eastern and south-eastern Europe (in which Russia played a dominant role) were characterized
by much lower income levels than central Europe (Figure 2.5). The income level of southern Europe was between
that of the two other regions during the late nineteenth century. Eastern and south-eastern Europe were on a growth
path during the late nineteenth century, but war, civil war and revolution during the early twentieth century derailed
their growth (see Highlight Chapter 2.1). In fact, political transformations and wars thwarted eastern Europe during
two periods: the 1910–20s and 1990s.

Figure 2.5 GDP per capita in three European regions, 1810–2010


Stature is often used as an indicator of health and nutritional status (see the Introduction to this volume). It is
interesting to compare how human stature also reflects economic development in eastern Europe. For example, the
crisis in the 1920s is clearly visible in the height records (Figure 2.6).16 During the early nineteenth century, stature
in eastern and south-eastern Europe is quite low; prerevolutionary heights in the late nineteenth century converge to
those of central Europe. In contrast, GDP per capita levels indicate a much lower development of production
capacity in these regions. However, we must carefully interpret this difference because height is sensitive to the
availability of protein in the diet. In eastern Europe, population density was still relatively low during the nineteenth
century; therefore, the availability of sufficient protein might have increased heights, while GDP per capita did not
follow the same process. Nutritional status tended to be similarly favourable in eastern Europe during the nineteenth
century, whereas the productive capacity and consumption of industrial goods were clearly higher in central Europe.

Figure 2.6 Height in three European regions and the World, 1810–1980 (males)

Source: based on Baten and Blum (2014).

Next, we consider developments in numeracy among the European regions (Figure 2.7). In general, we observe
an increase in basic education in all regions, which was at a higher level than the world average. Human capital in
eastern and south-eastern Europe increased substantially during the nineteenth century. The improvement in
numeracy in eastern Europe between 1810 and 1850 is so dramatic that we can interpret this as the eastern European
human capital revolution, which occurred over very few decades. By comparison, the early modern numeracy
revolution in western Europe was twice as large and considerably more gradual (from the fifteenth to the eighteenth
centuries). This numeracy increase was previously unnoticed because school enrolment evidence for Russia begins
in the 1870s (Mironov 2012). These data are consistent with some punctual cohort estimates for literacy in Russia
(literacy tripled over the same period but from a relatively low level). In all countries, basic numeracy increased
before literacy. Hence, this indicator reflects the first stage of human capital improvement.17

Figure 2.7 Numeracy in three European regions, 1810–1940s

Source: based on Crayen and Baten (2010).

All development indicators examined in this summary exhibit improvement: GDP per capita, human stature
and numeracy. However, the variation in speed is more interesting. For example, while relatively high numeracy and
school enrolment levels were reached quite early, gains in income and stature increased quite slowly during the

nineteenth century. Income and stature accelerated especially during the two decades following the Second World

Diffusion of industrialization to central and eastern Europe
during the nineteenth and early twentieth centuries

In the next section of this chapter, we detail European development during the last 150 years. Which countries
experienced faster growth and which experienced slower growth during this period? Which obstacles hindered these
countries? The industrial development that had begun in north-western Europe – especially in England and Scotland
– during the eighteenth century diffused to central and eastern Europe during the second half of the nineteenth
century (Figure 2.8).18 The heavily industrialized areas of the UK and Belgium were characterized by modest
industrial growth rates of 2.1 per cent and 2.5 per cent per year, respectively, whereas Germany (4.1 per cent),
Russia (5.1 per cent) and Scandinavia (3.3–4.4 per cent) grew considerably faster during this period. In contrast, not
all countries with catch-up growth potential achieved high industrial growth rates. Southern Europe advanced quite
modestly during the period 1870–1913, and industrial development in these regions had to wait until later in the
twentieth century.

Figure 2.8 Growth of industrial production, 1870–1913 (per cent per annum)

Source: based on Broadberry and O’Rourke (2010), who based it on the following original sources: Belgium:
Gadisseur (1973); Denmark: Hansen (1974); Finland: Hjerppe (1996); Netherlands: Smits, Horlings, and van
Zanden (2000); Norway: unpublished data kindly made available by Ola Grytten; Sweden: Krantz and Schön
(2007); United Kingdom: Feinstein (1972); France: Crouzet (1970); Italy: Fenoaltea (2003); Portugal: Lains

(2006); Spain: Prados de la Escosura (2003); Switzerland: unpublished data kindly made available by Thomas

David; Austria-Hungary: Schulze (2000); Germany: Hoffmann (1965); Russia: Goldsmith (1961).

Central and eastern European industries were able to grow for many reasons. In the Russian Empire, the
government invested heavily in growth relevant infrastructure (such as railroads, banks and imported technologies)
and supported industrial development in many ways, including substituting private entrepreneurship. In central and
northern Europe, new industries developed during this period that were highly complementary to the long tradition
of substantial human capital investment in these regions, of which chemical and electro-technical industries are the
most famous (Landes 1969, see Map 2.3). Although their employment share became only substantial during the
twentieth century, these technologies and new ‘scientific’ style of generating innovations influenced many other
fields. However, Broadberry and Burhop (2007) warn against overstating Germany’s industrial success relative to
Britain and reject a hypothesis of entrepreneurial failure in England for many industries.

Map 2.3 Regional economic specialization in Europe during the later nineteenth century

Source: see map 1.1.

Although industry experienced the most remarkable development – and has received the most research
attention – the other two sectors should not be neglected, that is, agriculture and services. Agricultural employment

declined but total production in this sector increased as new fertilizers were developed by the emerging chemical
industry and agricultural machinery gradually improved (from wooden to iron ploughs in poor areas; to threshing
machines in richer areas). A number of studies have focused on the dramatic effects of the so-called European grain
invasion. As transport costs decreased, a wave of imported wheat from the Russian Empire and North America
flooded Europe. The famous response in central Europe was the implementation of agricultural tariffs. In Germany,
for example, the imperial government was strongly influenced by east German aristocratic landowners to increase
grain tariffs. (However, there is some debate about the quantitative importance of these tariffs. See Broadberry and
O’Rourke 2010: p. 68.) The grain invasion also had an important impact on welfare, especially for the poor. Real
wages and nutritional levels increased, and stature began to increase during the 1880s, extending over more than a
century for the first time in human history (Figure 2.6). Income redistribution, social security programmes, and –
during the twentieth century – medical progress supported this trend.

How did the service sector develop during the period 1870–1913? Although the agricultural share of
unemployment decreased between 1870 and 1913 from just over 50 to just over 40 per cent, and industrialization
became a policy goal for most countries, some of the richest countries experienced stronger increases in the service
sector than in the industrial sector (Broadberry and O’Rourke 2010). In the UK, service sector employment
increased by 9 per cent (while industry grew by only 2 per cent). In Switzerland, service sector employment nearly
doubled from 16 to 28 per cent. Cities including London, Zürich and Geneva expanded their central banking and
trading positions. Broadberry and O’Rourke (2010) observe a stronger relationship between national income and
service sector employment than between income and industrial employment.

The first era of globalization, 1850–1913
The first era of globalization (O’Rourke and Williamson 1999) became visible in three economic markets: labour,
capital and goods. The latter two markets are relatively more important during the late twentieth and twenty-first
centuries than during the late nineteenth century, whereas integration in labour markets was of primary importance
during the first era of globalization, which occurred before the First World War. Migration from the Old World to
the New World reached levels of more than one million people per year, considering only transatlantic migration
(O’Rourke and Williamson 1999).

Higher land–labour ratios in classical destination countries, such as the US, Canada, Australia, Argentina and
Brazil, produced higher real wages in these countries than in Europe. Decreases in migration cost through
transatlantic passenger ships considerably increased the number of migrants, especially because immigration
policies in these destination countries remained liberal until the First World War.

Germany belonged to the group of first wave of source countries (large-scale western European migration
occurred before the mid-nineteenth century). In contrast, southern and eastern European migration occurred in the
decades preceding the First World War. Italian emigration was as high as 11 per cent of the total population during
the first decade of the twentieth century, whereas typical rates in Spain, Portugal and Austria-Hungary were
approximately 5 per cent per decade.19

It is astonishing that emigration from relatively poor southern and eastern Europe was initially more limited
than migration from richer north-western Europe. However, a number of factors play important roles in the
migration process, such as transportation, social and psychological costs. Potential migrants consider not only wages
but also hurdles, such as isolation and discrimination. Migration research indicates that the so-called friends-and-
family effect plays an important role. The migrant stock in the US was mainly British, Irish and German in the early
nineteenth century, and individuals of these nationalities migrated more often during the mid-nineteenth century
after the first small communities of their nationalities had been established (and travel costs decreased).

Recently, the selectivity of migrants has been studied more intensively. In contemporary debates over
migration, the educational level of immigrants plays an important role, including potential brain-drain effects on the
source countries. Did European countries experience brain-drain during the nineteenth century? This phenomenon
can be observed for Russia. Partly due to religious persecution during the 1890s, a substantial share of the Jewish
inhabitants of the Russian Empire emigrated, which reduced the human capital level of this country (Stolz and Baten
2012). In contrast, German emigrants around the mid-nineteenth century were less skilled than the population that
remained. This migration was caused by famine during the so-called hungry 1840s. Local communities were obliged
to care for the poor, and it was less expensive for communities to pay for tickets to the New World than for welfare
payments. This observation starkly contrasts with the narratives about German migrants in school books, which
usually emphasize the political refugees of the unsuccessful revolution of 1848 who were presumably highly
educated (but represented few of the total number of migrants).

The war and interwar years
After a relatively consistent increase in welfare in southern, eastern and central Europe, the First World War (1914–
18) ended this phase. The loss of human life was unprecedented and the destruction of the war areas immense.
Additionally, the war created a climate of distrust and economic disintegration. After the first era of globalization
(1850–1913), an era of deglobalization followed (O’Rourke and Williamson 1999). During the war, many of the
countries that had been buying European industrial products installed own industrial capacity (e.g., India). Other
markets were taken over by US or Japanese exporters, satisfying Latin American and Asian consumer demands. In
addition, south-eastern Europe promoted its own industrial development. These processes resulted in a doubling of
industrial plants and fierce competition in which governments interfered.20

Eastern Europe also experienced a unique development. After the October Revolution in the Russian Empire,
the introduction of Soviet-style socialism and later communism with nationalization of the main industries increased
heavy industrial production at the expense of consumer-oriented light industries and agriculture. The collectivization
of agriculture resulted in harvest failures and the death of a high share of the population, especially in Ukraine
during the early 1930s. On the other hand, the Soviet Union engaged in one of the most ambitious expansions of an
educational system. Soviet heavy industries were sufficiently developed in the 1940s to defeat the German army that
invaded Soviet territory during the Second World War, although imports of weapons and idealism also played a
large role.

After this short deviation, we return to central Europe during the interwar period. The deglobalization period
after the First World War reached its economic nadir during the Great Depression of the early 1930s. Germany was
among the countries most severely affected by the Great Depression because its recovery and rationalization of
major industries was financed by unsustainable foreign lending. In addition, war reparation obligations reduced
investment propensity and, perhaps most importantly, the government implemented a rigid austerity policy that
resulted in deflation (Ritschl 2002). As unemployment rates had reached unprecedented heights, the national
socialists accumulated government power and began to pursue their inhuman policies against the Jewish minority,
political leftists and many other groups. Following their election, the national socialists undertook a series of rapid
steps to abolish democracy. Figure 2.9 illustrates the rapid decline of political participation rights in central Europe
during the 1930s.21

Figure 2.9 Polity IV index for participation in European regions

Source: calculated from Marshall et al. (2011).

National socialist trade policy in Germany consisted of an autarkic policy regime that aimed to cancel all
imports, such as foodstuffs, that could be replaced with domestic substitutes or raw materials for the consumer-
oriented industries. Only imports of iron ore and similar items were considered necessary because a main aim of the
government was to strengthen the production capacity of military products. Interestingly, both the persecuted and
non-persecuted German groups suffered from these autarkic and trade-restraining policies. Mortality rates increased
in large cities even before the war. Additionally, the stature growth of children abruptly stagnated despite continuous
growth during the half century before and after (except the First World War and immediate post-First World War
periods. See Baten and Wagner 2003).

The Great Depression affected all European countries with unpredictable vigour. Reactions to the crisis varied
considerably, however. What determined the speed of recovery from the Great Depression among European
countries? One important issue was monetary policy. Many countries had adopted the gold standard during the
nineteenth century, which guaranteed that all bank notes could be exchanged for gold in the central bank of a
specific country. During the First World War, many countries left the gold standard and issued paper money that
was not guaranteed. During the postwar period, however, a return to gold was a policy driven by ideology. The gold
standard provided important advantages during periods of normal economic development in societies with a modest
level of communication technology. For example, investors in one country could be relatively sure that their
investments would not be lost in currency devaluations. This effect was one of the building blocks of capital
mobility during the first era of globalization during the period 1850–1913.

Eichengreen and Sachs (1985) famously argued that the countries that left the gold standard early (such as the
UK in 1931) faced the best prospects for rapid recovery. During the Great Depression, the effect of the gold standard
in countries that maintained it for a long period was severe. Italy, Switzerland, France, Belgium and Poland

maintained their gold standard policies until the mid-1930s. These countries experienced reductions in their
competitiveness because the UK, for example, could offer relatively cheaper products on international markets
following the devaluation of the British pound. Similarly, deflationary processes prevented potential investors from
stimulating the economy. Investors preferred to maintain their money reserves because the value of money relative
to goods increased. Many central and eastern European economies suffered from the agricultural protectionism of
industrial countries during the early 1930s, which preferred to stimulate their own agricultural sectors even if it was
less efficient to grow foodstuffs domestically than to import these products.

In contrast, the Soviet Union achieved rapid industrial growth, if the statistical evidence can be trusted. For
example, pig iron production in 1940 was four times as large as it had been in 1927 (Allen 2003, Buyst and
Franaszek 2010). Additionally, countries that generally maintained market economy systems, such as Poland,
experimented with nationalized chemical industries, armament and steel production.22

The Second World War had severe effects on European economies by redirecting world leadership to the US
and, partially, to the Soviet Union. The Nazi army destroyed a considerable portion of European infrastructure and
the occupied countries suffered heavily from forced labour, plundering of resources and indirect theft via excessive
taxes and ‘deliveries’ of raw materials. Physical capital in the occupied territories was destroyed by the war,
insufficient reinvestment and maintenance, whereas the industrial capacity of Germany increased substantially until
the end of the war despite heavy bombing. (However, much of this capacity was useless after the war because it
specialized in armament production.)

The golden age of the 1950s and 1960s
The two decades after 1950 are the so-called golden age of European economic growth.23 In the beginning, some of
this growth resulted from the shift from agriculture to industry and services in countries that had not yet fully
industrialized. All European economies became service sector economies with shares of services of approximately
60 per cent, except eastern Europe, which was characterized by a slightly smaller share. However, these GDP
growth effects of structural change tended to decrease over time. The relatively free markets of southern and central
Europe, including bridging some of labour shortages through migration as in Germany’s famous ‘Gastarbeiter’ – the
movement of southern Europeans into the country – contributed to the impressive growth of the 1950s and 1960s.
The predecessor institutions of the European Union were formed during this period, and they facilitated the
economic integration of the initial set of European countries. Additionally, capital shortages did not present major
growth obstacles as they had in previous periods because capital was relatively mobile across borders.

In addition to free markets and structural change, marked increases in efficiency resulted from new
technologies, especially from North America. These innovations enabled producers to save inputs and provide
cheaper products, which experienced increasing demand among larger population segments. Additionally,
intermediate goods could be easily imported or bought from domestic producers. Finally, economic policy during
this period was Keynesian and aimed to reduce and smooth business cycle effects. During this period of recovery
and relatively stable growth, Keynesian policies appeared to have worked well.

How did eastern and south-eastern Europe develop? According to official statistics, which have been used in
most previous publications, growth was quite strong in the USSR and particularly strong in Yugoslavia, where the
potential for productivity growth and structural change by transitioning from agriculture to industry persisted. In
addition, the unique socialist system of Yugoslavia in which factories were owned by workers and decision-making
was less centralized than in other socialist countries may have led to stronger growth. According to official statistics,
from the 1950s to the early 1980s, Yugoslavia was among the fastest growing countries, approaching the ranges
reported in South Korea and other growth miracle countries. However, it is difficult to evaluate the quality of
physical capital. This difficulty arises because the type of machinery produced in socialist countries specialized in
mass production of sometimes poor quality goods. After the breakdown of the socialist economies in 1989, the
evaluation of capital goods changed quickly because these goods were not equally valued in market economies as in
socialist economies. Another difficult topic is the evaluation of the quality of services provided in socialist
economies. Because prices in general were not always informative, it is difficult to estimate the prices of services
provided in these economies. Nevertheless, even if the absolute value of the growth rates was not as high as
indicated by the official statistics, both the Soviet Union and Yugoslavia were characterized by surprisingly high
growth rates of both income and education during the 1950s. The American and western European publics
experienced a so-called Sputnik shock after the Soviet Union placed the first satellite in space long before the
western economies were able to do so. This event might indicate how rapidly human capital had advanced during
the first decades of the Soviet Union. However, economic incentives and preferences of the socialist leadership
posed severe problems as economic structure changed during the subsequent decades.

Stagflation (1970s–1980s)
After the oil price shock in 1973, the period of European growth ended. The 1970s and 1980s became known for
stagflation, i.e., the combination of inflation and stagnation of economic growth. The economic theorists had
previously hypothesized that either inflation or stagnation could occur but not that both could occur simultaneously.

The initial turning point, the considerable increase in energy prices following conflict in the Middle East, leads
to the following question: was this development driven by resource costs? Could stagflation have been avoided if
energy prices had been lower? In fact, during the 1950s and 1960s Europe benefitted from low average costs of
energy, foodstuffs and other raw materials. However, other forces were also at work. Crafts and Toniolo (1996)
argued that slowing economic growth was simply an adjustment after a period of abnormally high growth rates. The
previous growth strategy of adopting North American technology was no longer possible because much of that gap
had been closed.

The 1970s were also a period during which European scepticism about unlimited industrial growth increased.
The Club of Rome report suggested that the previous strategy of industrial expansion at the expense of ecological
deprivation and depletion of resources was unsustainable. In Germany and other countries Green parties for which
ecological agendas were central were formed. Even in eastern Germany, the socialist German Democratic Republic
(GDR), there was an ecological movement temporarily supported by the government (however, this support was
soon terminated). The extreme environmental pollution of the 1950s and 1960s was modestly reduced during the
subsequent decades. However, this environmentalism was perceived as a luxury of richer European societies in
poorer countries. Southern European countries, such as Portugal, Yugoslavia and Spain, continued to pursue income
growth first. In Portugal and Spain, authoritarian regimes were overthrown and democratization began. The Iberian
countries were included in the European Community in 1986.

In eastern Europe, the situation differed because the socialist countries possessed their own energy resources
and government aims. However, the temptation to sell oil from Azerbaijan and other regions to the West after 1973
strained political-economic relations within the Eastern bloc. During much of this period, the Soviet Union had
among the lowest per-capita incomes in the socialist countries. However, Soviets were actually subsidizing its east-
central European satellite states through low energy prices. Especially during the 1980s, the inability of the socialist
economic system to create appropriate economic incentives became clear. Following political protests in Poland
(which were not suppressed to the same degree as earlier protests in the GDR, Hungary and Czechoslovakia) and
other signs of dissatisfaction, Mikhail Gorbachev and his followers initiated a drastic change of policy in the Soviet
Union in 1986, which transformed not only the political but also the economic systems of the socialist countries.

Finale: the 1990s and 2000s
The transformation from socialist to market economy system was harsh. GDP initially decreased substantially. Life
expectancy decreased and crime increased. For example, homicide rates doubled in many former socialist countries
and took several years to return to normal levels. Institutional economists moved to Russia and hoped that
institutional change would rapidly initiate economic growth; however, other factors also played an important role,
such as entrepreneurial traditions and self-images.

The 1990s were characterized by deepening European political-economic integration but also by crisis within
the European Union (beginning in 2006). Change in east-central Europe enlarged the EU to twenty-eight member
states, including former Soviet republics in the Baltic region. In many European countries, a common currency was
introduced that reduced the transaction costs of intra-European trade and increased mobility significantly. The
inflationary tendencies of the 1970s and 1980s disappeared. On the other hand, when EU countries, such as Greece,
experienced financial crisis, these countries could no longer devalue their currencies to regain competitiveness. In
Spain, Portugal, Italy and Greece, the youth unemployment rate was especially high during the 2000s. Even with
historically low interest rates, entrepreneurs did not invest sufficiently in new or existing businesses. The global
economic crisis that began in 2006 also reinforced some of the north–south differences that began to disappear in
Europe. In the 1990s and early 2000s, Germany was often discussed as ‘the sick man in Europe’. Germany
recovered from the 2006–08 crisis more quickly than the southern European countries did, and many northern and
central Europeans professed the belief that southern Europe had always been a difficult area.

Other important developments during the 1990s and 2000s included the economic restructuring that followed
the revolution in computer-based information and communication technologies (ICT). Although the trend began in
the 1970s and 1980s, during the 1990s almost everybody outside manual workplaces had permanent contact with
ICT. Surprisingly, although the change in economic systems was likely as large as the introduction of electricity at
the beginning of the twentieth century, the measured productivity effects of ICT in most industries seemed quite
limited (Solow 1987). The main effect of ICT was likely making workplaces and services more pleasant for workers
by reducing assembly line processes.24

One remarkable fact of European economic history since 1500 is the considerable variability in important
development and welfare indicators over time. For example, we observe surprisingly high standards of living in
southern and eastern Europe c. 1600. The real wages of urban populations benefitted from low cost of grain in
Eastern Europe. Nutritional status was also exceptionally high during the sixteenth and early seventeenth centuries
by the standards of the early modern period. However, as eastern Europe began to export its grain to north-western
Europe, food prices increased. In eastern Europe, the second serfdom resulted in exceedingly unequal distributions
of power and income. Consequently, this region trailed in the welfare race.

In Italy, Spain and Portugal, both human capital and national incomes were remarkably high during the
fourteenth and fifteenth centuries. During the nineteenth century, central Europe overtook its southern and eastern
neighbours in income and began to converge to the levels of north-western Europe. However, this positive economic
development was soon overshadowed by the catastrophic World Wars of the early twentieth century. The immediate
postwar period produced one of the few eras during which all European regions experienced economic growth at
substantial rates. The 1950s and 1960s were truly a golden age for many European countries. In eastern Europe,
however, socialism imposed strong constraints on economic development, which ultimately produced
transformations to market and mixed economic systems during the late 1980s. This chapter concluded with a
discussion of the transformation crisis in eastern Europe, the struggle for reform in central Europe and the global
financial crisis of the 2000s.


1. Hanushek and Woessmann demonstrated that numerical abilities are the most relevant skills to economic
development, which also supports the use of this indicator. See the Introduction and Chapter I2, ‘The Sputnik
shock’ for a more detailed discussion.

2. Neighbouring Portugal was a pioneer in the voyages around Africa to Asia, and to the Americas. Portuguese
merchants gained considerable wealth through intercontinental trade.

3. See the Introduction for the definition of this indicator.

4. If only urban real wages are considered, Poland always outperformed England due to low cost grain in the
surrounding areas. However, agricultural day labourers were relatively poorer than in England.

5. Agriculture in the Baltic region during the nineteenth century was characterized by relatively high numbers of
cattle per capita, which might have reduced the malnutrition-related problems of studying that are observed in
developing countries today.

6. The part of Poland that was included in the Russian Empire experienced early industrial development in textiles
during the early nineteenth century, especially due to the entrepreneurial spirit of its Jewish minority.

7. Land in the western Empire, especially Czech lands and the areas surrounding Vienna (which was also the
administrative centre of the Habsburg Empire), industrialized quite early.

8. This can also be observed looking at other indicators. School development was also low in many Balkan

9. In contrast, countries such as Bulgaria invested substantially in education during the early twentieth century
and educational indicators increased rapidly during this period. The Balkan region was characterized by a variety
of small economies (Serbia, Bulgaria, Romania, Albania, Montenegro, Slovenia and Croatia). In these economies,
large export surpluses of wool and other animal products were generated. Bulgaria also developed proto-industrial
production of woollen and other household and military goods.

10. Greece specialized in grain, wine, raisins, wool, tobacco and cotton; Greek shipping also dominated eastern
Mediterranean commercial routes between the eighteenth and mid-nineteenth centuries.

11. The regional specialization included, to a smaller extent, wine. Agricultural production was characterized by a
high share of subsistence farming in the mountainous regions.

12. In northern Italy, specializations varied considerably. For example, the Po Valley developed hard cheese
production. In northern Italy, the silk industry had survived since the early modern period and maintained its high
quality. Italy generated two-thirds of the world exports of silk during this period.

13. In the Basque country and other parts of northern Spain, the mining and iron industries complemented the
agricultural basis.

14. Farmers specialized in dairy farming in north-western Germany and the Alpine regions.

15. We define central Europe not by geographic or historical borders but by the income gap observed during the
nineteenth and twentieth centuries. This suggests that only Switzerland, Austria and Germany are included. East-
central and south-eastern Europe are included in the eastern region.

16. In contrast, the political crisis of the 1990s cannot be studied using this indicator because the height estimates
refer to the period until the 1980s only.

17. Usually, substantial increases in education precede welfare growth. In fact, during the late nineteenth century,
eastern and south-eastern Europe were on an upward trajectory, as indicated by their GDP per capita and their
height trends.

18. On the following few paragraphs, see Broadberry and O’Rourke (2010).

19. Return migration could reach nearly 30 per cent in the Italian case, whereas the numbers for eastern Europe
are smaller. Because most migrants were between the ages of 20 and 30, the size of this age group was
dramatically reduced in Italy.

20. New economic activities during this period in the Balkans included the development of the oil industry in

21. We will discuss the other aspects of this Figure only in passing. During the late nineteenth century, the
increase in political participation values was quite slow, while there was a significant shift towards more
participation during the first era of globalization (1850–1913) in all three regions. In eastern and south-eastern
Europe, levels of political participation remain relatively low. Interestingly, we observe a small increase in eastern
and south-eastern Europe c. 1850–60. For example, Serbians obtained some voting rights and Romania
temporarily became a partial democracy. Moreover, a short-lived increase can be noted c. 1910–20 (in Poland in
1920, for example). In southern Europe, a dramatic decrease is observed. In Italy, the decrease began during the
Mussolini regime, in Spain, the participation index declined during the Franco regime. Fortunately, during the
post-Second World War period, democratic values increased (with some support from the US and western
European democracies). In central Europe, increases took place slightly later, partially because eastern Germany
remained part of the Eastern Bloc until 1989.

22. On this and the following, see Buyst and Franaszek (2010).

23. On this and the following, see Houpt et al. (2010).

24. The quality of services also improved – an economic variable that is always difficult to measure.

Further reading

Alfani, G. (2013), ‘Plague in Seventeenth-century Europe and the Decline of Italy: an Epidemiological Hypothesis’,
European Review of Economic History 17, 408–30. Thought-provoking article on why Italy declined in relative

A’Hearn, B., Baten, J. and Crayen, D. (2009), ‘Quantifying Quantitative Literacy: Age Heaping and the History of
Human Capital’, Journal of Economic History 69–3, 783–808. Measures the human capital of early modern Europe.

Broadberry, S. N. and O’Rourke, K. (eds.) (2010), Cambridge Economic History of Modern Europe, Cambridge
University Press. The standard for comparative European economic history.

Crafts, N. and Toniolo, G. (1996), Economic Growth in Europe Since 1945, Cambridge University Press. Good
overview over the recent period.

Dincecco, M. (2011), Political Transformations and Public Finances, Cambridge University Press. Explains the
interaction between fiscal capacity and executive constraint as growth determinant.

Mironov, B. (2012), The Standard of Living and Revolutions in Russia, 1700–1917, Abingdon: Routledge.
Impressive and provocative study on Russian welfare development.

Ogilvie, S. C. and Overy, R. (eds.) (2003), Germany: a New Social and Economic History, Vol. III: Since 1800,
London: Arnold. An English-language overview on German economic history.

van Zanden, J. L., Buringh, E. and Bosker, M. (2012), ‘The Rise and Decline of European Parliaments, 1188–1789’,
Economic History Review 65 (3), 835–86. Provocative account of the early history of participation.


Acemoglu, D. and Robinson, J. A. (2012), Why Nations Fail: the Origins of Power, Prosperity and Poverty, 1st
edn., New York: Crown.

Allen, R. C. (2003), ‘Progress and Poverty in Early Modern Europe’, Economic History Review LVI-3, 403–43.

Baten, J. and Blum, M. (2014), ‘Why are you Tall while Others are Short? Agricultural Production and other
Proximate Determinants of Global Heights’, European Review of Economic History 18, 144–65.

Baten, J. and Wagner, A. (2003), ‘Autarchy, Market Disintegration, and Health: the Mortality and Nutritional Crisis
in Nazi Germany 1933–37’, Economics and Human Biology 1 (1): 1–28.

Becker, S. and Woessmann, L. (2009), ‘Was Weber Wrong? A Human Capital Theory of Protestant Economic
History’, Quarterly Journal of Economics 124 (2): 531–96.

Bibikov, M. (2013), ‘Russia: Early and Medieval Period’, in J. Mokyr (ed.), The Oxford Encyclopedia of Economic
History, Oxford University Press, 412–14.

Broadberry, S. N. and Burhop, C. (2007), ‘Comparative Productivity in British and German Manufacturing Before
World War II: Reconciling Direct Benchmark Estimates and Time Series Projections’, Journal of Economic History
67: 315–49.

Broadberry, S., Campbell, B., Klein, A., Overton, M. and van Leeuwen, B. (2014), British Economic Growth, 1270–
1870, Cambridge University Press.

Buyst, E. and Franaszek, P. (2010), ‘Sectoral Developments, 1914–1945’, in S. N. Broadberry and K. H. O’Rourke
(eds.), The Cambridge Economic History of Modern Europe, Vol. 2, Cambridge University Press, 208–31.

Crayen, D. and Baten, J. (2010), ‘Global Trends in Numeracy 1820–1949 and its Implications for Long-run
Growth’, Explorations in Economic History 47 (1): 82–99.

Crouzet, F. (1970), ‘Un indice de la production industrielle française au XIXe siècle’, Annales 25: 92–7.

Eichengreen, B. and Sachs, J. (1985), ‘Exchange Rates and Economic Recovery in the 1930s’, The Journal of
Economic History 45 (04), 925–46.

Feinstein, C. H. (1972), National Income, Expenditure and Output of the United Kingdom, 1855–1965, Cambridge
University Press.

Fenoaltea, S. (2003), ‘Notes on the Rate of Industrial Growth in Italy, 1861–1913’, Journal of Economic History 63:

Gadisseur, J. (1973), ‘Contribution à l’étude de la production agricole en Belgique de 1846–1913’, Revue Belge
d’Histoire Contemporaine 4: 1–48.

Goldsmith, R. W. (1961), ‘The Economic Growth of Tsarist Russia, 1860–1913’, Economic Development and
Cultural Change 9: 441–75.

Hansen, S. A. (1974), Økonomisk Vaekst I Danmark, Vol. II: 1914–1970, University of Copenhagen.

Hippe, R. and Baten, J. (2012), ‘The Early Regional Development of Human Capital in Europe, 1790–1880’,
Scandinavian Economic History Review 60 (3): 254–89.

Hippe, R. and Baten, J. (2014), ‘Keep them Ignorant. Did Inequality in Land Distribution Delay Regional Human
Capital Formation?’, Working Paper, University of Tübingen.

Hjerppe, R. (1996), Finland’s Historical National Accounts 1860–1994. Calculation Methods and Statistical Tables,
Jyväskylä: Kivirauma.

Hoffmann, W. G. (1965), Das Wachstum der deutschen Wirtschaft seit der Mitte des 19. Jahrhunderts, Berlin:

Houpt, S., Lains, P. and Schön, L. (2010), ‘Sectoral Developments, 1945–2000’, in S. N. Broadberry and K. H.
O’Rourke (eds), The Cambridge Economic History of Modern Europe, Vol. 2, Cambridge University Press,

Karaman, K. K. and Pamuk, Ş. (2010), ‘Ottoman State Finances in European Perspective, 1500–1914’, The Journal
of Economic History 70(03), 593–629.

Koepke, N. and Baten, J. (2005), ‘The Biological Standard of Living in Europe During the Last Two Millennia’,
European Review of Economic History 9 (1): 61–95.

Koepke N. and Baten, J. (2008), ‘Agricultural Specialization and Height in Ancient and Medieval Europe’,
Explorations in Economic History 45: 127–46.

Krantz, O. and Schön, L. (2007), ‘Swedish Historical National Accounts, 1800–2000’, Lund University
Macroeconomic and Demographic Database,

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Landes, D. S. (1969), The Unbound Prometheus: Technological Change and Industrial Development in Western
Europe from 1750 to the Present, Cambridge, New York: Press Syndicate of the University of Cambridge.

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Working Paper Series, No. 43.

Malinowski, M. (2014), ‘Freedom and Decline: Polish State Formation and Rye Market Disintegration, 1500–1772’,
working paper, University of Utrecht.

Marshall, M., Jaggers, G. K. and Gurr, T. R. (2011), POLITY IV Project Political Regime Characteristics and

Transitions, 1800–2010 Dataset Users’ Manual., last
downloaded 1 September 2014.

O’Rourke, K. H. and Williamson, J. G. (1999), Globalization and History: the Evolution of a Nineteenth Century
Atlantic Economy, Cambridge, MA: MIT Press.

Prados de la Escosura, L. (2003), El progreso económico de España, 1850–2000, Madrid: Fundaciòn BBVA.

Ritschl, A. (2002), ‘Deutschlands Krise und Konjunktur 1924–1934. Binnenkonjunktur, Auslandsverschuldung und
Reparationsproblem zwischen Dawes-Plan und Transfersperre’, Jahrbuch für Wirtschaftsgeschichte Beiheft 2/2002.
Berlin: Akademie Verlag.

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European Review of Economic History 4: 311–40.

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Posthumus Institute, University of Groningen,

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Migrant Selectivity?’, Explorations in Economic History 49: 205–20.

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The Sputnik shock, the Pisa shock: human capital
as a global growth determinant

Joerg Baten

Many pupils in school do not like maths, and those who like it are often despised as ‘nerds’. However, maths skills –
and education in general – are decisive for the following question: will your country be rich or poor? Some countries
follow a path of reinvesting income into education, sustaining more skill-intensive industries. Better education,
therefore, does not only increase the current human capital of the labour force, but it also permits the development of
additional innovations and adaptation of new technologies that can be imported from foreign countries. Having this
relationship in mind, many advanced countries experienced shocks in their histories: the US public suffered from a
Sputnik shock during the 1950s, when the Soviet Union demonstrated innovative capabilities in space. The German
public experienced a ‘Pisa shock’ during the early 2000s when testing of problem-solving abilities demonstrated that
German school children did not succeed well in maths, reading and natural science tests. East Asian and
Scandinavian school children were far ahead in the first tests, suggesting that economic growth would be much more
rapid in these world regions. Both the shocked US and Germany initiated expensive educational investment
programmes thereafter.

Dramatic shocks like these initiated research projects that also considered long-term developments. The
traditional view of economic historians was that human capital could not have played a large role in eighteenth and
nineteenth century growth because two of the best-studied countries seemed to be inconsistent with this growth
theory. Mitch (1991) noted that Britain experienced stagnating literacy between the mid-eighteenth and mid-
nineteenth centuries, whereas France was quite early in its educational development without becoming a driving
force of growth in nineteenth-century Europe. Baten and van Zanden (2008) rejected this view by taking a long-term
perspective: they found that starting in 1450, there was a substantial influence of advanced human capital on welfare
growth, even considering other potential determinants such as institutional development (constraints of the
executive), trade and Malthusian forces.

Hanushek and Woessmann (2012) studied the components of human capital and argued that maths and science
skills, in particular, are the most important ones. They suggested a new measurement of these components by
employing data from the Organization for Economic Co-operation and Development (OECD) and the International
Association for the Evaluation of Educational Achievement (IEA), for the period 1964–2003. Hanushek and
Woessmann include this new ‘measure of cognitive skills’, as they call it, as an explanatory variable of economic
growth. If this variable is added to a growth model, three-quarters of the variance in growth rates can be explained.1

In contrast, running a regression with a growth model that utilizes school enrolment rates as an indicator instead, just

one-quarter of the variance in growth rates can be explained. If both variables are included as explanatory variables,

school enrolment becomes statistically insignificant, whereas the maths and science skills keep their explanatory
power. Conditional GDP growth can be explained with conditional ability test scores with an R2 of 0.98 (although
there are only eight world regions).2

Additionally, basic maths skills have also been studied for long-run development. In Figure I2.1, we see world
regions’ trends of basic numeracy (see the Introduction for an explanation of the method). The richest world regions,
western European/North American industrial countries, eastern Europe and East Asia, had high numeracy values
already, during a period when East Asia was still poor. Relatively low levels of numeracy were found in the Middle
East and South Asia (similar rankings can be observed as soon as maths test results can be obtained).

Figure I2.1 Numeracy of the world regions during the nineteenth and twentieth centuries
Note: ‘industrial countries’ represent western Europe, North America, Japan.

Source: calculated from Crayen and Baten (2010).

It appears that a high degree of numerical abilities was already developed by some countries before the
nineteenth century (Figure I2.2). In addition, basic numeracy in 1820 correlates with maths/science skills during the
late twentieth century. However, looking at individual country histories, there was significant mobility; some
countries declined in levels of numeracy, others increased (this makes it clear that genetic interpretations are

Figure I2.2 Maths and science cognitive skills, 1964–2003, and numeracy, 1820 (ABCC Index)

Source: modified from Baten and Juif (2013). Nigeria added from Cappelli and Baten (2015).

However, one of the crucial questions in assessing human capital as a growth determinant is the degree of
exogeneity with higher income, which allows for more substantial investment in schooling. Therefore, the direction
of causality can potentially run the other way. In addition, another question arises of whether human capital is only a
proximate growth determinant, following underlying factors such as institutional design. Some factors related to
human capital development have been proposed by the literature stating that human capital is not simply a function
of institutional design and not a perfect correlate of income; religious rules can determine education in a relatively
exogenous way. Botticini and Eckstein (2007) offered a human capital interpretation of Jewish economic history in
which they ascribed Jewish educational rigour to a decisive moment in the first century CE.3 Although the Jewish
religion previously had no specific rules about education, in that century, the religious group of the Pharisees gained
dominance over the competing Sadducees, and the main religious rule emerged requiring parents to teach their male
children to read the Torah. Botticini and Eckstein argued that this was a relatively exogenous religious decision that
was not determined by demand because Jews remained mostly farmers for another seven centuries. Only in the
eighth and ninth centuries, when the Middle East became more urbanized, could Jews finally make economic use of
their exogenously created human capital. The Jewish elite began to specialize in trade, banking, medicine and
similar professions; legal constraints came later.

Similar to this human capital history of the Jewish religion, Becker and Woessmann (2009) offered an
alternative explanation to Weber’s theory about the Protestant confession. Analysing differences in literacy between

nineteenth-century Prussian Protestant and Catholic countries and employing instrumental variable methods, they
concluded that human capital was exogenously accumulated by Lutherans. The religiously determined need to read
the Bible allowed Protestant regions to prosper economically and caused Catholic regions to fall behind.

A number of other exogenous determinants of human capital have been studied in the literature, which we can
only briefly mention here. Such factors include, for example, the following: (1) the curse of natural resources. A
number of studies have identified the problems arising from the discovery of natural resources such as oil in a
country, because apart from currency effects, inequality and changes in relative prices, the political economy of
resource rich countries might also tend towards under-investments in human capital. (2) Similarly, land inequality
can be an obstacle to human capital development. Galor et al. (2009) developed a theory in which large landowners
normally decided to invest less in the schooling of their day labourers, partly because they tried to avoid additional
taxes and partly because they wanted to keep their day labourers on their estates. (3) Some important events in
history, like lost wars, were motivators for direct schooling investments, such as the Russian situation after the
Crimean war or the French situation after 1871. (4) Malnutrition can be a very important factor as well. Beyond a
certain threshold of malnutrition, learning of tedious maths, in particular, is impossible. Baten et al. (2014) recently
studied the natural experiment of the Napoleonic blockade in England that resulted in malnutrition. This event
delayed numerical development. In other contexts, the factor of malnutrition played a role as well. (5) Additional
determinants are demographic behaviour (the decision between quantity of children and more education for fewer
children), the relative status of women, contact with immigrants from other countries and a number of other factors.

In sum, education and maths skills, in particular, are a very important determinant of economic growth, and
there are many reasons to conclude that the decision for more or less education was exogenous in long-term


1. Only initial GDP level is added in this and the following regression.

2. Hanushek and Woessmann also ensured that endogeneity is not a problem.

3. See also Baten and Juif (2014) on the following.


Baten, J., Crayen, D. and Voth, J. (2014), ‘Numeracy and the Impact of High Food Prices in Industrializing Britain,
1780–1850’, Review of Economics and Statistics 96 (3): 418–30.

Baten, J. and Juif, D. (2014), ‘A Story of Large Land-owners and Math Skills: Inequality and Human Capital
Formation in Long-run Development, 1820–2000’, Journal of Comparative Economics 42 (2): 375–401.

Baten, J. and van Zanden, J. L. (2008), ‘Book Production and the Onset of Modern Economic Growth’, Journal of
Economic Growth 13 (3): 217–35.

Becker, S. and Woessmann, L. (2009), ‘Was Weber Wrong? A Human Capital Theory of Protestant Economic
History’, Quarterly Journal of Economics 124 (2): 531–96.

Botticini, M. and Eckstein, Z. (2007), ‘From Farmers to Merchants, Conversions and Diaspora: Human Capital and
Jewish History’, Journal of the European Economic Association 5 (5): 885–926.

Cappelli, G. and Baten, J. (2015), ‘A Reversal of Fortune in Human Capital: Colonialism and Numeracy in Africa,
1790–1969’, Working Paper, University of Tuebingen.

Crayen, D. and Baten, J. (2010), ‘Global Trends in Numeracy 1820–1949 and its Implications for Long-run
Growth’, Explorations in Economic History 47 (1): 82–99.

Galor, O., Moav, O. and Vollrath, D. (2009), ‘Inequality in Landownership, the Emergence of Human-capital
Promoting Institutions, and the Great Divergence’, Review of Economic Studies 76 (1): 143–79.

Hanushek, E. A. and Woessmann, L. (2012), ‘Do Better Schools Lead to More Growth? Cognitive Skills, Economic
Outcomes, and Causation’, Journal of Economic Growth 17 (4): 267–321.

Mitch, D. (1991), The Rise of Popular Literacy in Victorian England, Philadelphia: University of Pennsylvania


State finances during civil wars

Pablo Martín-Aceña

Economic conditions affect the development and outcomes of wars. The amount of resources available to the
warring parties is usually a determinant of the final result. An advantage in resources can be readily transformed into
military superiority in order to better meet the needs not only of the war effort, but also of the rearguard, essential
for keeping up the morale of the population. Resource superiority usually reflects a higher level of economic
development, which in turn allows for greater flexibility in adapting the productive structure to the necessities of the
war. This argument has been confirmed for the case of the two world wars where the final outcome has been
considered ‘primarily a matter of levels of economic development of each side and the scale of resources that they
wielded’ – and this also applies to the Spanish Civil War, as we will see below.

There are four ways of paying for a war: taxation, public borrowing on the domestic market, borrowing from
foreign markets and money creation. All require the intervention of the State. War financing methods have varied
greatly, depending on internal and external constraints, institutional factors and on the length and intensity of the
conflict. Evidence shows that governments have financed wars by using a mixture of direct contemporaneous taxes,
debt and money creation. Adam Smith argued that taxes were the best method of financing because they conveyed
the real cost of wars to the general public. A. C. Pigou added debt, although he considered this policy as equivalent
to taxation. John Maynard Keynes suggested that money creation would be acceptable until the point of full
employment was reached. Moreover, Keynes argued against the use of debt financing and wrote in favour of the use
of rationing and price controls.

During the latest two world wars public expenditures increased and governments resorted to all possible means
to finance the war effort. Governments used a mix of contemporaneous taxes, debt and money creation. When it was
possible taxes were raised. Borrowing was intense and, as a result, government indebtedness multiplied. Deficits
were unavoidable and as a result new money was thrown into circulation causing inflation and currency

The experience of at least four nineteenth and twentieth century civil wars tells the same story. In the American
Civil War, the Union covered its expenses by collecting new taxes, but most of the revenue needed to finance the
war came from money creation (the well-known greenbacks) and from the issue of debt. The Confederacy, unable to
pay for the war effort through taxation, resorted to selling bonds abroad in either London or Amsterdam and to
issuing currency on a huge scale. Inflation both in the north and in the south was the concomitant result of printing
money. In the long Mexican Civil War, the two confronted armies tried to raise taxes and to borrow from the public
and to sell bonds abroad. However this was not sufficient to meet the expenses and henceforth the printing press was

given additional work. Prices skyrocketed and the Mexican peso depreciated sharply. Revolutionary Russia offers a

third example, which if anything is even more extreme. The Bolshevik faced insurmountable difficulties to finance
the war: the fiscal administration collapsed, the domestic financial market vanished and markets abroad were closed
to soviet issues. Paper money became the sole means of financing the deficit caused by the increase in war
expenditures. As happened in other instances during civil or international wars, in Russia prices also rose
unrelentingly to hyperinflation levels.

For the Spanish Civil War all these same arguments apply. To cover the costs of the war, taxes were an
insignificant source of income for either of the two combatant parties in Spain. Neither of the contenders introduced
major changes in the tax system. Most of the measures merely raised some tax rates or duties and only in the last
month of the conflict was a tax on excess profits introduced. Neither of the two sides resorted to issuing debt,
although the Republicans made an attempt in the last year of war, without success. The two contenders made
extensive use of confiscation and expropriation of goods and properties of families and firms considered to
sympathize with the enemy. The main source of internal financing of both sides was money creation. The Republic
resorted to advances and credits from the Bank of Spain: the issue of new money represented 60 per cent of the
Republicans’ total revenue. On the other side, new money accounted for almost 70 per cent of the acknowledged
internal expenses of the civil and military administration of the nationalist state during the war. To pay for foreign
supplies, both the Republicans and the Franco administration consumed huge amounts of foreign reserves. The
former used up the entire metallic (gold and silver) of the Bank of Spain. The latter received an equivalent amount
of funds in the form of so-called aid from the Axis nations (Germany and Italy).


Property rights in the Russian Empire

Irina Potkina

Property rights and their regulation are a crucial determinant of economic growth. How did they develop in the
Russian Empire, and when were they formulated as binding laws? The laws about the right of property began to take
shape in the 1830s. They represented a systematic version of the existing laws. The Russian politician Mikhail
Speranskii was the driving force of this legal clarification initiative. In 1832, Article 420 of the Civil Laws
delineated the right of ownership precisely, although it lacked sufficient harmony and conciseness. In 1832, the right
of ownership was divided into its constituent parts: possession, use and disposal. The separate existence of the
generally accepted triad was established in domestic jurisprudence at the turn of the 1860s to the 1870s on account
of the Civil Department of the Directing Senate.

In the period of reforms during the 1860s, the legal texts about property rights were further improved, and new
content was added to the laws: the socio-economic reforms required the Russian government to clarify its position in
the field of property rights and their protection. The judicial practice played a key role in this question, and its
results were generalized in corporate resolutions of the Directing Senate. In total it approved 151 definitions
concerning the property right on movables and realty for the years 1866–1910. The Civil Department of the Senate
focused on the problems of the owner’s full authority, protection from invasion by a third person and other co-
tenants, the implementation of joint tenancy and the relationship on the basis of dual ownership. All these matters
were of paramount importance for doing business. The Senate’s activities resulted in the creation of institutions
previously unknown to the Russian law.

In the Russian Empire, the property right to land was limited by the strict estate boundaries, while the
overwhelming majority of the population, i.e., peasants, could not exercise it unconditionally and without
government interference. Such a situation was not compatible with the legal meaning of the law and resulted in the
development of a unique system of peasant rights, which lasted until 1917. Moreover, Jews and Poles also suffered
under the law and in most cases, the restrictions were of religious and political nature.

Further Russian peculiarities were legal regulations on the purchase and sale of land. The state took on the role
of the principal and exclusive initiator of any changes in the conditions of those transactions. Regulations of market
relations in the agricultural sector allowed the government to use redistributions of land ownership in the country to
fulfil specific objectives of economic policy. Distinctive features of the general land policy of the Russian
government were protection of interests of the land-owning nobility in the western parts of the Empire and the local
population in the border areas, as well as the proprietary rights of the peasant class.

Rapid development of railways in the nineteenth century forced the state to recognize that it was necessary to
alienate immovable property for their construction. The law on expropriation of immovable property and the rules of
compulsory purchase of land were adopted on 7 June 1833 and renewed on 19 May 1887. The adopted law had
shortcomings, as for example it did not fully consider the interests and benefits of landowners in determining the
compensation for the land taken from them by the railway company. In that pivotal question for economic
development of the country, the current legislation lagged behind substantially.

By the end of the nineteenth century, the firm as a private legal institution had entered the German legislation
only. In Russia, the term ‘commercial enterprise’ included the entire relationship relevant to a person’s business.
Trademarks and firm name were important assets of a company. The initial meaning of the firm name was as
follows: a commercial enterprise under which a merchant conducts his business, using signs, labels and
advertisements, as well as a name, associated by consumers with the trade reputation of the company. It has since
been regarded as a commercial institution having monetary value.

Russia adhered to the principles of genuineness and exclusiveness of the firm. Merely the registration of
enterprises allowed the implementation of these two principles. According to Russian company law, only highly
confirmed partnerships and joint-stock ventures were recorded officially, but not one-man enterprises, which
constituted the vast majority of commercial and industrial establishments. Judicial practice allowed the transfer of
company rights to others. The company owner enjoyed protective power, both administrative and judicial, although
in the absence of universal registration was hardly attainable.

Property rights regulation remained one of the most complex tasks in the Russian legislation and was not
accomplished until the end of the Empire in February 1917. Nevertheless, improving the legal support of owner
interests was in progress.


The United States and Canada

Price Fishback

The United States and Canada have been among the richest nations in the world for the past two and a half centuries,
as shown by the gross domestic product (GDP) per capita estimates in Figure 3.1. The US and Canada are endowed
with large amounts of fertile soil and natural resources. Before becoming colonies of European nations after 1500
and the countries they are today, the areas were lightly populated relative to many other areas. Seeing opportunities
to obtain access to land, large numbers of people have migrated from the rest of the world. The populations in the
US and Canada were able to take great advantage of these resources by establishing governments and economies
that gave people extensive political and economic freedoms, strong protection of property rights and largely
unbiased rule of law. Both countries have managed largely to avoid the destructiveness of warfare on their home
territories, although their participation in various wars elsewhere have involved sacrifices that slowed their progress.
The nature of the governments led to broad-based educational systems designed to educate the whole population,
first at the elementary school level in the mid-1800s then to the high school level in the early 1900s and with broad-
based university educational opportunities after the Second World War. The combination of all these factors have
allowed their populations to develop a wide range of innovations in goods and services, productive processes and
organization of the economy. Economic growth has not been positive in every year, as the economies have gone
through a variety of short-lived recessions and one decade-long Depression. Despite these hiccups the economies of
Canada and the US have experienced growth patterns that have led them to maintain their statuses as being among
the richest nations in the world.1

Figure 3.1 Real GDP per capita in North America (in 1990 dollars)

Source: Maddison (2001);

Pre-colonial development
Most scholars believe that the early populations of North America first moved across a land bridge near Alaska into
the continent thousands of years ago. People lived in relatively small groupings of hunters and gatherers distributed
throughout North America with lifestyles strongly tied to their local environments. Native Americans in the eastern
United States and Canada often trapped game in forests and produced some maize and other crops. North-west
Indian tribes near rivers that ran to the sea often had stable food sources. The Plains Indians often travelled over
large swaths of territory while hunting and gathering. Many of these tribes seemed to have diets with many calories
from meat and other sources and were not typically scarred heavily by disease. One measure of the net gain from
nutrition after losses due to work and disease as children is adult height. The Plains Indians in the nineteenth century
were among the tallest populations in the world (Steckel and Prince 2001).

European colonialization
European contact began with the Norsemen in the tenth century along the north-east seacoast of Canada. The
settlements appear to have been short-lived, possibly due to the similarity of outputs producible in Scandinavia and
northern Canada and the problems of navigating trade routes at that time.

Migrations of Europeans from Spain, England, France and the Netherlands most heavily influenced the path of
North American development from the sixteenth century onwards. Spaniard Hernando Cortez first arrived in the
Aztec nation in Mexico in 1513. After Cortez’s discovery of gold and silver there and his success in taking control
of the Aztecs, the Spaniards continued to arrive. Ponce de Leon explored Florida, and Coronado searched for
mythical seven cities of gold in the American south-west in the 1540s.

Meanwhile, English, French and Dutch explorers discovered that the areas that became Canada and the US
were lands with enormous diversity of natural resources. Settlers from these countries began establishing colonies
along the Atlantic coastline and further inland along larger rivers. After some fighting, the local Indian tribes made
peace with the settlers or more often the tribes moved westward. This pattern of encroachment by people of
European ancestry, short-lived fighting, accommodation and eventual moves westward would continue for nearly
three centuries. Unfortunately for the Native American tribes, the respect and protection of private property
described below did not carry over to the Native American’s resource claims.

One key to colonial expansion appears to have been the development of a ‘staple’ that was demanded in the
trade with Europe and its colonies. In the first half of the 1600s Virginia initially expanded with the production of
tobacco using indentured servants and then increasing numbers of slaves after 1660 (see Map 3.1 for the most
important imports and exports c. 1750). South Carolina produced rice using slave labour. Canada offered fur, timber
and fish. New England’s tall trees were used to produce ships and Pennsylvania and the middle colonies produced
many foodstuffs. Colonial cities specialized in trading services. Over the course of the 1700s the data on price
fluctuations in Pennsylvania and many European ports show increases in market integration that was slowed and
interrupted whenever wars broke out (Dobado-Gonzales et al. 2012).

Map 3.1 Trade in North America during the eighteenth century

Source: See map 1.1.

The structure of the political economy of the colonies and regional differences in the early 1800s were
influenced by the nature of staple production, among many factors. Slavery dominated tobacco, rice and later cotton
agriculture in the south. Consequently, the income distribution was skewed heavily towards large plantation owners,
with a sizeable group of smaller farmers in the middle class, and a large share of slaves at the bottom. The plantation

owners between 1780 and 1860 were among the wealthiest people in the world based on the value of the slaves they
owned. The owners insured that their own children were educated with tutors and access to universities, and did not
push for widespread public education. The planters in many southern areas banned the education of slaves (North

The gains to slaveholding in the northern and middle colonies diminished over time and their governments
eventually banned slavery in the last quarter of the 1700s. Production of wheat and foodstuffs for market and
subsistence was characterized by smaller family farms outside the south, which led to a more equal income
distribution than in the south. Many northern states offered private elementary schools after 1800 and most northern
states offered public education by the 1840s.2

Creating an independent nation with a broad range of economic

After the French and Indian War – an extension of the Seven Years War in Europe – ended in 1763, the English
gained hegemony over the area along the eastern seaboard north of Florida and further inland in many areas. The
English Crown and Parliament had long regulated colonial activity and trade relatively loosely. When they tightened
enforcement and sought to increase the colonists’ share of the tax burden of England’s defence of the colonies after
the war, the colonists in the area that became the US protested that they had had no say in these changes and
established temporary trade embargoes against England. Tensions escalated with each new round of regulation,
enforcement and protest. In April 1775 shots were fired in Lexington and Concord in Massachusetts, and a
revolution erupted. In 1776 a Continental Congress of representatives from each English colony outside Canada sent
a Declaration of Independence to King George III. The statement that each individual had the inalienable right to
‘life, liberty, and the pursuit of happiness’ has become a central tenet of US government. This was true to some
extent of Canadian government, even though Canada remained under British control until it began a slow process of
independence with Confederation in 1867. By 1781 the American colonists had managed to outlast the British and
gain their independence, despite the apathy or opposition of over half of the colonial population and only a handful
of victories on the battlefield.

Dissatisfaction with the problems associated with a loose confederation of states in the six years following the
war led Americans to call a Convention in 1787. The American Constitution that came out of the debates,
negotiations and compromises of the convention delegates has become arguably the most important political and
economic document in world history. When combined with the Bill of Rights, added after the Constitution was
ratified by the votes of the states, it established a wide range of individual rights and freedoms not granted by any
government before: protection of private property, patents and copyrights, free speech, freedom of the press,
freedom of religion, the right to sign contracts without government interference, a representative democracy, the
right to trial by a jury of one’s peers and a series of other individual rights too numerous to mention here. The
document gave the national government the right to collect some taxes, to engage in foreign policy and dominion
over interstate trade. Many government features were allocated to the states, but the states could not issue their own
currency nor could they interfere with trade between states.

Many of the ideas and the institutions supported in the Constitution had been developing in England and in
many countries during the Enlightenment, but they came to full fruition in North America. As many countries have
discovered since, the document itself was not enough. It was the commitment of the American people and
governments to follow the strictures of the document in their policies and in the decisions made by courts,
presidents, governors, mayors, legislators and administrators that truly counted. As President, Revolutionary War
General George Washington led the way to peaceful transitions to new leaders by not running for a third term as
President, and resisting efforts to get him to run again later.

As the nation’s government officials at all levels met the day-to-day challenges of running a democracy, cooler
heads devoted to the ‘Grand Experiment’ most often prevailed in debates and controversies. Under Chief Justice
John Marshall, the Supreme Court established the principal of judicial review of the laws created by the legislative
and executive branches of government and struck down attempts by governments to interfere with private contracts

and to limit trade of goods and services across state lines. Imperfect as the process has been, the general trends have
been to expand the political rights of the populace in fits and starts. Property requirements for voting were
eventually eliminated. Popular votes for Senators and a variety of other reforms were established in the Progressive
Era of the early 1900s. Voting rights were given to women by various states in the late 1800s and early 1900s and by
the national government in 1920. Slavery was eliminated in the 1860s and eventually the Jim Crow laws that had

disenfranchised blacks after slavery were struck down in the 1960s.3

Wars and other crises have led to temporary restrictions of freedom for some groups. Since 1900 the expansion
of government regulation and social insurance has created some tensions with respect to individual economic
freedoms. Economic freedoms have generally been protected, although the search for security against misfortune
that has contributed to expanded government regulation and social insurance has limited the freedom of individuals
to make their own economic decisions to some degree.

Measures of democracy, like the Polity 2 scores in Figure 3.2 and measures of economic freedom and the
unbiased rule and administration of law like those created by the Heritage Foundation, routinely show that the US
and Canada (after 1870) led the way initially in these areas and continue to be among the world leaders in economic
and political freedoms, the protection of property rights and the unbiased rule and administration of law. Numerous
studies show that the economic freedoms, well defined property rights, and the rule of law are strongly and
positively correlated with high levels of income and wealth. A variety of economic historians and economists have
developed theoretical models and empirical analyses that suggest that these factors were significant factors that led
to the advanced development of the countries with the highest per capita incomes in the world today.4

Figure 3.2 Polity 2 scores of democracy in North America
Note: the Polity 2 measure (world) is only calculated for non-colonies.

Source: Marshall et al. (2011).

The economy from 1790 to 1914
In the early 1800s North America was largely agricultural with more than 80 per cent of the population in farming.
Most of the manufacturing centred on the first stages of transformation of raw materials with lumber and saw mills,
textiles and boots and shoes leading the way. Americans borrowed and sometimes stole the methods for textile
manufacturing that were being developed in England at the time, and English textiles were considered superior.
Prior to 1865 American textile manufacturers fared best when protected from foreign competition through
Jefferson’s embargo’s on trade during the Napoleonic Wars, the War of 1812 and whenever textile tariffs were high.
There were a number of American innovators who adapted foreign techniques to an American environment that had
much more access to wood and land than the Europeans did. Innovators like Eli Whitney developed manufacturing
based on replaceable parts, and Pennsylvanians began to exploit first coal deposits and then oil deposits in the late
1850s for fuel. In Map 3.2, coal and other economic activities in mining and industrial production of the US c. 1890
are shown. The rich resource endowments contributed to the rapid economic expansion during the nineteenth

Map 3.2 Regional economic specialization in the US during the late nineteenth century (selected industries and

Source: see map 1.1.

The US territory expanded with the purchases of the Louisiana Territory in 1803, Florida in 1819, the Gadsden
purchase in the 1850s and Alaska in the 1860s. Americans forcibly took land away from Mexico, as they led the
charge in creating a Texas nation in the 1830s and won the south-west and California during the Mexican–American
War of 1848. Canada began settling the British Columbia area in the late 1840s. With more and more land available,
people migrated westward, typically along the same latitudes. Ample land availability allowed the number of
farmers to keep growing, but activity in manufacturing, services, transportation and other sectors grew at a much
faster pace. Thus, by 1860 the share of the farm population in the US had fallen from over 80 per cent to roughly 50
per cent.

Cotton production drove the expansions of agriculture westward in the south and, in fact, accounted for a large
share of all American exports (North 1966). Although no more slaves could be imported after 1808, the slave
population grew as rapidly as the free population in the south. The emphasis on slavery and the relative lack of
railroads and urban areas led many to see the south as a backward economy. However, even after slaves are included
in the totals, the per capita incomes in the American south were among the highest in the world behind the American
north and some leading countries in Europe. The slave owners were among the wealthiest people in the world. The
irony was that in the country that has always been a world leader in establishing and protecting individual freedoms,
a large region relied on slave labour through the early 1860s. The conditions under which slaves lived were better
than in many slave societies in the Caribbean, but the lack of freedom was a harsh reality (Eltis 2000, Fogel 1994).
Limitations on the education of slaves and the low levels of their wealth and property when they were freed by the
Civil War, combined with the development of postwar unequal political economic settings, contributed to relatively
low incomes for the ex-slaves and their offspring for many decades afterward (Higgs 1977, Margo 1990, Wright

Population growth, 1800–1940
Much of the economic growth of real GDP in North America prior to the Civil War came from the expansion of the
population. In an environment with ample land and heavy reliance upon farming, birth rates were substantially
higher than in Europe. Meanwhile, ample supplies of food and less crowding of the population into cities led to
lower death rates. Most of the population growth in the colonial period and the first half of the nineteenth century
came from these high natural rates of increase; yet the native growth was supplemented by migrants from Europe,
who themselves were seeking new lands and often came in increasing numbers during famines in Ireland and
Germany in the late 1840s and early 1850s.

From the colonial period through the 1930s, the population growth rate slowed down progressively from a high
of about 3–3.5 per cent per year in the colonial era to around 2 per cent per year by 1900. The crude birth rate
declined from 55 births per thousand people c. 1800, to 30 by 1910, to 19 in 1940 (Atack and Passell 1994: Table
8.2). Birth rates remained higher on farms than in cities, but the birth rate declined in all areas over time with
occasional surges when new frontiers opened up. Farm families had more incentives to have children because they
could help around the farm at relatively young ages and women were not pulled away from productive activity on
the farm while minding the children. Yet, birth rates declined even on farms as more and more mechanical and
biological changes allowed farmers to rely less on labour (Haines 2000).

The death rate also declined on a long-term trend from around 25 per 1,000 people in 1800 to 11 by 1940,
although there were fluctuations around the decline. The most spectacular short-run spike in death rates occurred
during the Spanish influenza epidemic of 1918, when the death rate spiked from about 14 to 18 per thousand in less
than a year. The declines in infant mortality were even more dramatic, as the number of infant deaths per thousand
live births fell from over 200 prior to 1850, to 120 in 1900, to 43 in 1940. After the Civil War, much of the decline
in death rates came from improved diets and standards of living. Improvements in water treatment and sanitary
facilities in cities led to dramatic drops in death rates after 1890. Similarly, basic public health education relating to
hand washing, sterilization in hospitals and a variety of basic techniques contributed to declines in disease and
mortality as the information diffused. On the medical front, most of the gains came from the development of new
vaccines and the pasteurization of milk. The decline in death rates associated with medical improvements tended to
come after 1920 with vast improvements in medical science.5

After the end of the Civil War in 1865, the possibility of high earnings in America and Canada led to large
increases in the number of immigrants. As seen in Figure 3.3, real GDP per capita was substantially higher in
Canada and the US than in Europe at the time. Even as late as 1910 annual earnings in American manufacturing
were 40 to 50 per cent higher than in northern and western Europe, and often double or triple the levels of earnings
in southern and eastern Europe (Rosenbloom 2002). The English, Irish, Welsh, Scottish, Germans, French and
Scandinavians dominated the immigrant groups prior to 1890. A number brought mining and manufacturing skills
that they taught to American workers, and a large share became entrepreneurs. Even though the first immigrants
from a family often did not become industrialists, a disproportionate share of their children did. After 1880
immigrants began leaving the farms and unskilled labour work in southern and eastern Europe in droves to come to
North America. Roughly one-third returned home to start farms or businesses with the earnings they accumulated.
Those who remained were a central reason for the rapid expansion in the industrial sectors of the United States.

Figure 3.3 Ratio of real GDP per capita of North American countries to real GDP in north-western Europe (1990

Source: based on Maddison (2001).

Evidence on average adult height in large samples can be used as an alternate measure of relative standards of
living because people are taller when they have better nutrition as children and are not stunted by childhood
diseases. The average heights in Canada and the US shown in Figure 3.4 were substantially higher than in the rest of
the world for most of the nineteenth century, consistent with the better standards of living suggested by earnings
differences. In Figure 3.4 heights declined in both countries in the latter half of the nineteenth century, while heights
in western Europe grew, so that the height differences in 1890 and 1900 were not as dramatic as the differences in
manufacturing earnings and GDP per capita.6

Figure 3.4 Height in centimetres (male) in North America

Source: based on Baten and Blum (2014).

The immigration boom was eventually slowed by political and economic restrictions. Chinese and Japanese
immigrants were excluded from the US by federal laws in 1882 and 1907, respectively. The First World War slowed
immigration to a trickle. In the early 1920s nativist sentiment in the US, partly driven by a desire to restrict the
supply of workers and keep wages higher for native workers, led to immigration restrictions that were specifically
targeted at slowing the immigration from southern and eastern Europe to a trickle. Within the past thirty years the
share of immigrants in the population has risen sharply again based on large legal and illegal flows from Latin
America, acceptance of refugees from war-torn countries and expanded immigration from East Asia (Cohn 2002).
Some of these flows into the US were slowed by new restrictions aimed to prevent terrorist attacks in the wake of al-
Qaeda’s use of airplanes to destroy the World Trade Center towers and part of the Pentagon on 11 September 2001.

Long run per capita income growth
Conjectural estimates of growth in income per capita based on census data every ten years suggest that the longer
term growth rates slowly rose from roughly 0.5 to 1 per cent per year to around 1.6 per cent per year between 1840
and 1860. However, not all measures of welfare show signs of progress in this period. A number of studies have
shown that average height for people born between 1820 and 1860 fell during the ante-bellum period. The difference
in the two measures might reflect greater problems with the spread of disease in urban areas and between areas that
were trading more regularly than before. Diseases often stunt growth during childhood by putting a greater drain on
the nutrition that children receive (Baten, Crayen and Voth 2014).

The growth rate of 1.6 per cent per year from 1840 to 1860 has been the long-run average growth rate ever
since, despite severe downturns in the 1890s and the Great Depression and a series of other shorter and less deep
recessions. The rate implies a doubling of income per capita roughly every forty years in the US. The US and
Canada have been among the few advanced nations where advances in standards of living have continued growing
enough during good times to much more than offset depressions and slowdowns. In many nations around the world,
advances over periods of time have been wiped out by wars and depressions and stagnant periods (North et al. 2009:
ch. 1).

National measures of agricultural productivity per acre did not grow very fast between 1800 and 1930, but this
national aggregate figure hides an enormous amount of activity. Trial and error with various seeds led to the
development of a variety of crops. The mixture of a Mexican strand with existing strands of cotton led cotton bolls
to open wide like a flat hand at harvest, which dramatically raised the amount of cotton that could be picked per day.
New strains of wheat allowed farmers to produce in Canada and the northern Great Plains and opened the door for a
wheat boom. Cross-breeding of cattle and sheep expanded the amount of meat, leather and wool that could be
extracted from each animal. Farmers constantly had to develop new methods and seeds to combat crop diseases just
to keep producing the same amount. Meanwhile, improvements in steel ploughs, the development of mechanical
reapers, and a variety of new implements after 1840 allowed farmers to increase the acreage that they worked and
also led to the development of new agricultural implements industries in the midwest (Olmstead and Rhode 2008).

The expansions in the ability of farmers to feed more people, new technological and organizational innovations
and the availability of immigrant labour when needed helped fuel one of the most impressive expansions in
industrial activity in world history. Industrial expansion had begun well before the Civil War but it increasingly
accelerated over time. The boom was fuelled by coal, and mining activity continues to expand and fluctuate with the
business cycle even to this day. From 1840 through 1910 transportation costs across the country were cut by the
expansions of railroads throughout the nation. Meanwhile, canals and riverboats innovated and remained
competitive with railroad traffic throughout the century. Investments in railroad capacity went through several
swings from peak to trough. Since railroad stocks and bonds accounted for a large share of the financial instruments
at the time, the swings in investment had strong influences on financial markets and contributed to major financial
crises in 1873 and in the 1890s. These financial swings also had world-wide implications because many British and
some European investors had invested heavily in American stocks and bonds.

US steel capacity expanded rapidly after 1860. The US was ranked fourth in the world in 1870 and became the
world leader by 1910 with a capacity that was larger than the next three countries combined. New inventions and

improvements in existing inventions in the form of telephones, electric lights, automobiles, oil refining and a wide
range of new mechanical devices opened the door for improvements in the standard of living among American and
Canadian consumers. Many firms grew large by taking advantage of economies of scale and better communications
to run nationwide operations (on the business history of the time, see also Highlight Chapters 3.1–3). The average
size of firms grew still larger with a merger wave around 1900. Concentration in these industries raised fears of
monopoly that would drive prices higher and output lower, but many of these firms were cutting costs so fast that
the trends were towards lower price and more output in these industries. Even so, the Justice Department during the
presidencies of Theodore Roosevelt and William Howard Taft went on a trust-busting binge, culminating in the
break-up of the Standard Oil Company and the American Tobacco Company in 1911.

Many workers shared in the success of these large firms, which typically offered the highest wages in the
world. In most cases workers were not represented by unions, and shared in the gains because a large number of
employers competed to hire workers who were relatively mobile throughout the country. Some of the gains were
won through collective action, however, despite the fact that US labour law did not force firms to recognize unions
when more than 50 per cent of workers voted to organize until the National Labor Relations Act in 1935. US unions
tended to be much more business-oriented than most European unions and the US never developed labour parties in
the way that many other countries did.

Between 1865 and 1914 the US and Canada became increasingly interconnected with the world economy.
Workers flowed into and out of both countries, as did financial capital to fuel the economic expansions. This
increased globalization came to a halt with the First World War and the interconnections with the rest of the world
economy retracted sharply over the next thirty years during the Great Depression of the 1930s and the devastation of
the Second World War that followed until 1945. The fiscal and monetary consequences of the enormous debts and
inflationary policies that followed the First World War by the warring nations, and the large reparations payments
demanded by Germany, contributed to enormous problems with international financial markets in the 1920s. The US
had more success at returning to the gold standard than most countries after the war. The result was a much more
patchwork version of the gold standard that fell apart in the 1930s. These global issues contributed to the Great
Depression in North America and the rest of the world in the 1930s.

After the First World War and a short but deep recession in the early 1920s, the US domestic economy grew
relatively rapidly with low inflation until 1929. Farming, coal mining and shipbuilding showed signs of distress as
they declined after rapid expansions during the First World War. The US went through a rapid housing boom
between 1920 and 1926 as the housing construction delayed during the First World War combined with rising
demand for housing associated with rising incomes. Declines in construction and housing values began in the late
1920s. Meanwhile, hundreds of small banks with assets strongly tied to local economies failed each year when local
industry and/or local crops suffered downturns.

A recession that started in the summer of 1929 was worsened first by a stock market crash in October 1929 that
harmed household balance sheets and created more uncertainty that slowed durable goods consumption. The
adoption of the Hawley-Smoot Tariff Act in 1930 contributed to a downward spiral in American exports and world
trade as other countries responded with their own trade restrictions. Federal Reserve Bank officials faced twin
dilemmas in dealing with three major clusters of bank failures while at the same time trying to provide support to
international attempts to maintain the gold standard. These central bankers thought that low nominal discount rates
on loans to national banks were a sign of loose policy supporting troubled banks, and they focused more on

offsetting gold outflows, as when Britain went off of the gold standard in September 1931. They waited through
three major banking crises until the spring of 1932 to prop up the liquidity of the banking system through a series of
large-scale purchases of government bonds in open market operations. In consequence, a large number of banks
failed and credit availability seized up as deflation rates of 8 to 10 per cent drove real interest rates above 10 per
cent, a level nearly double the real rates seen since. These policy moves combined with a wide range of negative
shocks to the economy that are still not measured well contributed to drops in real output in 1933 to 70 per cent of
the 1929 level and unemployment rates that exceeded 20 per cent from 1932 through 1935.7

One problem faced by US banks was that they were often relatively small in size due to rules against branch
banking in many states and branch banking across state lines. In contrast, Canada’s banking system experienced
problems but no failures in part because they had large-scale banks with offices spread across the entire country and
thus were protected more against shocks to local area economies (Bordo et al. 1995).

Despite extraordinary policy attempts by first Herbert Hoover and even more extraordinary policies followed
by Franklin Roosevelt and the Democratic Congresses of the New Deal Era, the US remained in Depression
throughout the decade (Fishback 2010). As in many countries, real output turned upward again after the US left the
gold standard, but the US was growing out of a deep hole. The US economy experienced a major setback in 1937–
38 after the Federal Reserve attempted to limit the potential for inflation by doubling bank reserve requirements in
three steps and the federal government balanced its budget. Real output per capita did not return to its 1929 level
again until 1940 and unemployment rates remained above 14 per cent until 1940. Even though American output then
rose rapidly during the Second World War and the induction of 10 per cent of the workforce into the military cut
unemployment to 2 per cent, real consumption per capita during the war fell and Americans sacrificed in numerous
ways. As a result, from a consumer welfare perspective, the Second World War in America was just an extension of
the Great Depression. It was not until consumption and private investment boomed after the war that North America
truly left the doldrums of the Great Depression (Higgs 1992 and 1999, Edelstein 2000).

The destructiveness of wars
Many Americans have a misguided notion that wars are good for the economy, perhaps because they have not
experienced a full-scale war on American soil since the end of the American Civil War in 1865. The expenditures
and losses of life from the four years of Civil War amounted to war costs roughly equivalent to a full year of real
GDP. The major benefit of the war was the manumission of slaves. The cost of the war was so large that a matching
amount could have been used for a peaceful settlement that would have bought all of the slaves at 1860 peak market
prices from their owners, given each slave family ‘40 acres and a mule’ to give them some land and capital for a
good start and paid about half of the GDP in 1860 as back wages to the slaves (Goldin and Lewis 1975).

During the world wars of the twentieth century North Americans fared better than the rest of the combatants.
Aside from the attack at Pearl Harbor on 7 December 1941, neither world war was fought on North American
territory. Americans and Canadians entered both wars relatively late and helped turn the tide towards victory for
their allies. Meanwhile, between 55 and 100 million lives were lost in the rest of the combatant countries, millions
more became displaced refugees and huge amounts of physical capital were destroyed. One sign of the horrendous
damage is the sharp spikes between 1940 and 1950 in the ratios of real per capita GDP in the North American
countries relative to western Europe in Figure 3.3. Five years after the Second World War ended, the western
European countries had still not recovered to the 1940 level shown in Figure 3.1, while in North America the growth
had been rapid since the war.

Yet, even in North America, the wars meant sacrifice. The effect was much larger in the Second World War,
because North American participation lasted two to three times as long. Even before entering each war, the US
federal government shifted production from normal civilian goods to war-time goods. During the peak of Second
World War activity, nearly 40 per cent of US GDP was devoted to war production. Decisions about large swaths of
the economy were largely made for military purposes and nearly all relevant inputs were allocated to the war effort.
Many goods were rationed, prices and wages controlled and many durable consumer goods were no longer
produced. People have underestimated the costs of making the transition from a peacetime economy to a wartime
economy and back. Real measures of consumer spending per capita at best stayed the same and, once the rationing
and price controls were taken into account, consumption per person may have declined. Large segments of the
workforce were inducted into the military, paid half wages, and roughly half of those were sent into harm’s way.

Some people gained from the war. Stock prices rose. The people who remained at home did see increases in
wages and savings given their limited consumption opportunities, and some groups, notably minorities and women,
saw their opportunities expand. Particularly during the Second World War there was a sense of common sacrifice
towards a worthy goal that seemed better than the psychological doldrums during the Great Depression of the 1930s.
Companies in the war industries did well. Once the war ended, consumption and investment ramped up rapidly, but
this was more a sign of the opportunities missed had the war never been fought than a stimulus driven by the war
(Higgs 1992 and 1999, Edelstein 2000).

Postwar era
After the Second World War the US spent large resources in providing a significant share of the defences for the
non-Communist world. The share of US GDP devoted to its own defence and the defence of its allies averaged
above 10 per cent in the 1950s and then declined to 8 per cent in the 1960s, to 6 per cent in the 1970s and 1980s, and
below 4 per cent after 1990. At the end of the war, Germany, Japan and Italy disarmed, the Soviet Union established
hegemony over eastern Europe and the US established a strong countervailing military presence in western Europe
and on the Pacific Rim. After President Truman dropped nuclear bombs in Japan to end the war in the Pacific, an
arms race developed between the USSR and the US and its allies in the North Atlantic Treaty Organization (NATO).
Over the next several decades both sides developed enough nuclear warheads to destroy the world several times
over. As the lunacy of the Cold War continued, there were attempts to reduce the number of missiles through treaty
agreements. Meanwhile, the US and to a lesser extent Canada sought to combat the spread of Communism in a
‘police action’ in Korea in the early 1950s, and misadventures in Vietnam and Southeast Asia in the 1960s and early
1970s, and in various other trouble spots around the world.

During Ronald Reagan’s presidency in the 1980s, the US ramped up defence spending from less than 5 per cent
of GDP in the late 1970s to above 6 per cent of GDP, and sought to develop a star wars missile defence system that
would maintain its advantage. Much to the surprise of nearly everybody, except maybe insiders in the Kremlin, the
Soviet Union’s focus on military and defence spending turned out to be unsustainable. Mikhail Gorbachev led the
way to Perestroika, and the Soviets released their hold over eastern Europe, most strongly symbolized by the
destruction of the Berlin Wall between East and West Berlin, Germany, in 1989.

Even as the Cold War ended, the US retained a policing role. Iraqi leader Saddam Hussein invaded Kuwait in
1990 and the US led a group of allies to stop the invasion and return Kuwait to its independent status. After the end
of the Gulf War with no Cold War left to wage, the US tried to figure out what to do with the ‘peace dividend’ that
was said to come from reduced military spending requirements. President Bill Clinton and a Republican Congress
after 1994 managed to run a federal government budget surplus for one of the few times in the postwar era.
Unfortunately, the fanatic terrorist group al-Qaeda managed to use commercial airliners to destroy the World Trade
Center and part of the Pentagon on 11 September 2001. President George W. Bush and Congress responded by
declaring a ‘war on terror’, and sent troops into Afghanistan with additional forces from a variety of allies. Saddam
Hussein’s boasts that he maintained weapons of mass destruction led Bush and Congress to invade Iraq in 2003. The
combination of tax rate cuts, Bush’s willingness to expand government spending for compassionate conservatism
and the waging of two wars, contributed to a return to federal budget deficits of between 1.5 and 3.5 per cent of
GDP between 2001 and 2008.

Productivity advances after the wars
Even as world military affairs absorbed the attention of many US leaders, there were enormous changes in the
domestic economy. North America experienced two rapid eras of growth in productivity, from 1950 to the early
1970s, and then from the late 1980s to the mid-2000s. Invention and innovations in the twentieth century were based
both on new mechanical developments and in developments that could only occur through enhanced knowledge of
basic sciences. New understanding of engineering has led to extraordinary advances – from radios and phonographs
to televisions, compact disk players to personal computers, iPods to the internet, iPads and smart phones. Today,
with a satellite connection, a monthly data plan costing $30 and a smart phone, people can listen to the world’s
greatest music (however each may define it), watch the greatest performers (soon in 3D), access a very large share
of the world’s books, talk to their friends and shoot videos with a device that fits in the palm of a hand. Advances in
biology, chemistry, astronomy, numerous other sciences and cross-breeding across disciplines have led to heart
transplants, hip replacements, numerous surgeries, cancer treatments and other medical advances that have allowed
people to live pain-free and active lives at increasingly advanced ages.

A great deal of the productivity advances have come from the development of human capital. Both countries
focused on educating large segments of their societies. Canada and the US led the world in numeracy measures
(Figure 3.5), based on the share of people who report their ages without heavily reporting multiples of 5 and 10 until
around 1840. By 1900 the average American had a sixth grade education. Forty years later, 50 per cent of
Americans of the appropriate age were graduating from high school. North America has offered widespread
opportunities for university education with college graduate rates rising from less than 5 per cent for people born in
1900 to roughly 30 per cent for those born in the early 1980s. Both the US and Canada over the past few decades
have developed high quality universities, which attract top students from around the world. Both countries have
benefitted greatly as significant numbers of foreign students graduate and then stay in the US and Canada,
particularly in the sciences and engineering. A disproportionate share of these students have become leading
entrepreneurs in companies that have grown among the largest in North America. While North America led the
world in widespread high school and university education for much of the twentieth century, the North American
lead in high school education has largely been eliminated by the 2000s and many countries around the world are
investing to catch up in university and graduate education (Goldin and Katz 2008, Field 2011).

Figure 3.5 Numeracy index in North America
Note: South Asia included in ‘world’ only from 1840, Africa from 1870.

Source: based on Crayen and Baten (2010).

The business cycle
The US economy might best be described as following a path of long-term growth in per capita income with
occasional downturns and some serious drops. The US economy has gone through numerous fluctuations and
financial crises. The Great Depression of the 1930s was likely the worst drop in terms of percentage output. Earlier
downturns were harsh because per capita incomes were at much lower levels. Major downturns occurred in the mid-
to late 1830s, the mid-1870s, the early 1890s, 1907–08, the late 1970s and early 1980s, and 2007–09, with shorter
and weaker downturns in other periods. Problems in the financial sector were associated with some of these
downturns, but the direction of causation was as often from the real sector to the financial sector as it was the other
way around.

Canada and the US have maintained strong banking and financial systems. The best illustration of this is when
the banks failed. Most of the bank runs in American history were not broad-based runs on all banks but were often
narrowly targeted at the bank where a fraud or major drop in asset values occurred. The runs then spilled over to
other banks that shared directors or had strong ties to the original bank. In many situations in the nineteenth century,
and again in 1907–08, clearinghouses in major cities played a role in maintaining stability by insuring that stronger
banks provided liquidity to the weaker banks in the face of bank runs. Even then most of what people have read as
‘failures’ were actually ‘suspensions’ of redemptions of bank currency in the nineteenth century or suspensions of
withdrawal of deposits in the twentieth century. Most of those banks reopened within weeks or months. In the true
failures most people got most of their money but often with a substantial delay. These suspensions were still painful,
particularly in the nineteenth century, because delays of a week to a month were scary, and delays of several years in
obtaining assets were often ruinous (Wicker 2000).

In the Reemployment Act of 1946 the US federal government took responsibility for ensuring economic
growth, low unemployment and low inflation. Such hubris seems odd after the experiences with fiscal and monetary
policy in the 1930s, but the economy performed quite well over the next twenty-five years. Real GDP per capita
between 1947 and 1969 rose about 2.6 per cent per year with only three years of negative growth, inflation measured
by the GDP deflator rose 2.5 per cent per year and the unemployment rate averaged about 4.7 per cent. The second
longest expansion in American history occurred in the 1960s. Economists had become confident that they could
smooth the business cycle mostly with Keynesian fiscal policy, particularly after the Kennedy tax cut in the early
1960s appeared to stimulate the economy. In hindsight, the tax cut looks more like a supply-side tax rate cut because
the deficit actually was smaller during the cut.

Overconfident economic policymakers faced their comeuppance in the 1970s. The long understood negative
relationship between inflation and unemployment represented in the Phillips curve no longer held in the 1970s,
when the combination of both high unemployment and high inflation, known as stagflation, became common. The
Nixon administration tried to stop the inflation with wage and price controls, but these at best slightly delayed the
rise in inflation. The Organization of Petroleum Exporting Countries (OPEC) nations flexed their muscles by
doubling oil prices between 1973 and 1975 and again in the late 1970s. The Federal Reserve responded by using
expansionary monetary policy to try to reduce unemployment in the short run. Economic models of adaptive
expectations and rational expectations developed in the late 1960s and early 1970s predicted that these attempts
would just lead to more inflation with at best temporary effects of reducing unemployment. They were proved right,

as inflation rates neared 10 per cent along with unemployment rates above 9 per cent in the late 1970s and early

In the early 1980s Federal Reserve Chairman Paul Volcker sharply reduced inflationary expectations with a
tightened monetary policy with the consequent cost of a nasty rise in unemployment. Meanwhile, the Reagan
administration and Congress cut tax rates for individual households in a move designed to stimulate aggregate
supply. Although they continued the push for deregulation of banking, transport and other industries begun in the
Carter administration in the late 1970s, the Reagan administration and 1980s Congresses did not control spending as
carefully and budget deficits in the Reagan and first Bush administration ranged between 3 and 6 per cent of GDP.

What followed was extraordinary success. Between November 1982 and December 2007 the American
economy experienced three of the five longest expansions in its history with minor setbacks at the beginning of 1990
and around 2000–01. Real per capita GDP grew 2.1 per cent per year, and inflation averaged about 2.5 per cent,
while unemployment rates fell below 6 per cent from 1995 to 2007. The stock market boomed to record levels as the
internet and ‘dot com’ companies shifted the nature of information and marketing in the late 1990s. After a dot com
bust in stocks in the early 2000s, the markets recovered again to new peaks in late 2007. Meanwhile interest rates
were extraordinarily low.

Of course, once policymakers and businessmen become convinced that they have the answer to smoothing the
business cycle, new troubles appear in a different form. In response to the dot com bust in stocks and the recession
that followed, Alan Greenspan and the Federal Reserve drove interest rates down and many people shifted to
investing in housing. The Clinton and Bush administrations and Congress pressured Fannie Mae and Freddie Mac to
purchase and guarantee riskier mortgage loans in an attempt to increase home ownership among minorities and
lower income groups.8 Meanwhile, investment banks thought they had developed new ways to diversify risk and
limit risk on mortgages by combining large numbers of home mortgages into mortgage backed securities (MBSs)
that were backed by the value of the homes. These were then combined into collateralized debt obligations (CDOs)
to spread the risk further. Finally, the owners of the CDOs and others could buy insurance on these CDOs in the
form of credit default swaps (CDSs). With housing prices rising rapidly, particularly in the south-west and Pacific
coast and major cities, losses on resales of foreclosed homes were not as large. Thus, the MBSs, CDOs, and CDSs
seemed less risky, and ratings agencies gave these securities high ratings because they were backed by real homes
that retained much of their value even when borrowers defaulted on the loans.

When housing prices began tumbling in 2006, the investors and investment banks began to discover that their
new methods protected them against the risk associated with specific investments but not against wholesale declines
in a broad range of the assets. By December 2007 the economy moved into recession, and the stock market began a
decline that led values to fall by more than half from its new all-time peak that month. In 2008 the US federal
government helped bail out the financial sector by merging failing investment banks into other financial groups,
taking over insurance giant AIG, becoming the conservator for Fannie Mae and Freddie Mac, taking ownership
stakes in banks and automobile companies and providing Federal Reserve credit for the first time to a broad range of
companies. The problems in the US spilled over to banks throughout the world. Canadian banks were level-headed
enough to stay mostly out of the fray and Canada’s economy performed relatively well.

The US officially came out of recession in early 2009, but the unemployment rate remained at 9 per cent or
above to September 2011, and above 8 per cent to May 2012, before finally falling below 6 per cent in 2014. The
share of working age population employed fell from around 63 per cent in 2007 to less than 59 per cent in August

2009 and has remained below that level throughout 2014. In one of the few true stated attempts at Keynesian
stimulus in American history, the Obama administration and a Democratic Congress pushed through a stimulus
package that doubled the deficit from 5 to 10 per cent of GDP, but this did not resolve the unemployment problem.
Even though the Federal Reserve has flooded the economy with liquidity with large-scale purchases of government
and mortgage-backed securities, interest rates are at record lows and inflation has stayed at a low level. Meanwhile,
the S&P 500 stock market index has recovered to reach record highs by 2014. Yet, the problems with housing have
not been resolved and many banks still hold a significant number of CDOs that contain troubled mortgages and thus
credit has remained tight. Meanwhile, problems with sovereign debt in the euro zone and various disasters in the rest
of the world have contributed to a slow recovery in the US.

Growth of government
Likely the biggest change in the North American economy of the twentieth century has been the expansion of the
role of government in the economy, particularly the federal government. Circa 1900, large numbers of economic
decisions were not much influenced by government regulation. Decisions that were affected were mostly influenced
by local or sometimes state regulations. The attitudes of opinion leaders at the time generally avoided reliance on
government support. Over the next fifty years these attitudes changed markedly as the federal government expanded
its role to large degrees in response to the crises of the two world wars and the Great Depression. In all three periods
government activity and regulation expanded to high levels, they retracted after the crises but to higher levels than
otherwise would have happened. Since that time expansions of government’s role has followed from smaller crises
(Higgs 1987, Fishback et al. 2007).

The changes have come more through changes in regulation and transfer payments than direct government
consumption and expenditures on final goods and services. Despite phases of deregulation of banking and transport
in the late 1970s and early 1980s, overall federal regulations have continued to expand in all areas of American life.
Pure transfers to the poor have grown from about 1 per cent to 3 per cent of GDP, in part due to rises in health care
expenditures associated with Medicaid for the poor. Much of the rise in the ‘welfare state’ has come in the form of
government social insurance, in which a worker or their employer makes payments into a fund that entitles them to
benefits when they reach retirement age or become disabled, ill, unemployed or injured on the job. Americans have
smaller expenditures on public social welfare systems than Canadians and many of the western European countries.
The major reason is that about half of American health care spending is private, most often through private
insurance with employers. Once this spending is incorporated, Americans spend as much or more on social welfare
as any country in the world.

The greatest expansions in the US in public social insurance have come through the social security old-age
pension programme enacted in 1935 and the Medicare programme for elderly health care enacted in 1964. Both are
operated as pay-as-you-go programmes. Working people and employers pay taxes into a ‘trust fund’ that is then
invested in government bonds, which are basically promises that the federal government will collect enough taxes
from future taxpayers to fund pensions and medical care for the current workers when they reach the appropriate
age. This would work well if the number of workers always kept pace with the number of retirees.

The demographic changes in the US have led and will continue to lead to increases in the costs of running the
programme. The US had a baby boom with a peak in live births in 1957. The rise from 18 to 25 births per thousand
people looks small in comparison to the decline in births from 55 per thousand in 1800, but this rise is on the verge
of having major consequences. Meanwhile, higher incomes, better medical technologies and better public health
practices have led to a very large increase in the share of the population aged 65 and over. Up to 2011 more social
security and Medicare taxes have been collected each year than benefits paid out because the tax rates have been
raised. For social security, for example, tax rates have risen from 1 per cent each on employer and worker in 1940 to
over 6 per cent each in 1988 before the share paid by the worker was ‘temporarily’ cut to 4.2 per cent in 2011. The
extra funds have then been used to fund other projects. As increasing numbers of baby boomers reach social security
and Medicare retirement ages over the next two to three decades, the ratio of workers to retirees will continue to fall.
This has created a long-run budget problem on top of current budget problems that will lead to either continued

increases in tax rates or reductions in benefits. Meanwhile, both federal and state governments have also poorly
funded the pension programmes for their workers. Thus, in the future we are likely to see either continued expansion
in taxes and transfers based on the social insurance schemes or retractions in their benefits.

The US and Canada are actually in better shape with respect to social insurance than most western European
countries and Japan, because the US working age population is growing faster than in those countries, in part due to
higher birth rates and also due to more immigration. The western European nations have larger social insurance
programmes and a future with even lower worker to employer ratios. The problems with Greece’s sovereign debt in
2011 that have created so many problems for the European Community and the countries that use the euro currency,
rest in part on exactly these problems with social insurance and may be a harbinger of things to come.

Since around 1700 the history of Canada and the US has been the history of two of the richest populations in the
world. Blessed with a large amount of natural resources relative to the size of the population, both countries
developed economic and political institutions that gave them more economic and political freedoms than almost any
country. The combination has led to enormous expansions in population and per capita GDP. One important feature
to note about the last fifty years is that the US and Canada are still among the richest countries in the world even
though growth rates in real GDP per capita are much slower than recent growth rates in China and the rest of the
developing world. The reason is that these other countries are starting at a base that is often much lower. Thus, 10
per cent growth in China raises real GDP per capita by $500 to $600 per year currently, while 1.6 per cent growth in
the US raises its per capita GDP by over $700 per year. A number of people considered to be poor in the US and
Canada have incomes that are above the median in more than half of the world’s nations.


1. For volumes that provide detailed statistical and narrative descriptions of the economic history of the US and
Canada, see Carter et al. (2006) and Social Science Federation of Canada and Statistics Canada (1983).

2. For discussions of the colonial period in America, see Walton and Shepherd (1979) and McCusker and Menard
(1991). For discussions of the role of resource endowments and their impact on institutions see Engerman and
Sokoloff (2012) and Acemoglu and Robinson (2012). Go and Lindert (2010) describe the early path of American

3. For extended discussion of the role of government in American economic history, see Fishback et al. (2007).

4. For examples of studies that show the importance of institutions for economic development, see Barro and
Sala-i-Martin (2003), Acemoglu and Robinson (2012), North et al. (2009) and a large group of others.

5. See Higgs (1971), Fox (2011), Moehling and Thomasson (2012) and Haines (2000).

6. For discussions on the changing height in the nineteenth century, see Craig et al. (2003) and Komlos (1998).
Zehetmayer’s (2011) findings for US Army soldiers suggest a more positive picture of US heights growing after
1880, which we used.

7. For discussions of monetary and fiscal policy in the Great Depression, see Atack and Passell (1994: ch. 21),
Eichengreen (1992), Meltzer (2001), Friedman and Schwartz (1963), Fishback (2010) and Temin (1989).

8. Fannie Mae was created as a government corporation in 1938 to purchase conventional mortgages and to
provide more liquidity and stability to the mortgage market. In the late 1960s and early 1970s the US government
officially removed its backing and then created Freddie Mac as a competitor in the same role.

Further reading

Atack, J. and Passell, P. (1994), A New Economic View of American History, 2nd edn., New York: W. W. Norton
and Company. A very good summary of various debates in US economic history that developed out of the
Cliometric revolution that began in the 1960s. Cliometrics is the application of economic and statistical methods to
the study of history.

Carter, S. B., Gartner, S. S., Haines, M. R., Olmstead, A. L., Sutch, R. and Wright, G. (2006), Historical Statistics of
the United States, Earliest Times to the Present: Millennial Edition, Cambridge University Press. This is a five-
volume cornucopia of statistics and essays about a wide range of socio-economic measures of the American
economy that is also available through most university libraries online.

Eichengreen, B. (1992), Golden Fetters: the Gold Standard and the Depression, 1919–1939, Oxford University
Press. This is a widely cited volume about the role of the gold standard in the world economy in the interwar years.

Engerman, S. and Sokoloff, K. (2012), Economic Development in the Americas Since 1500: Endowments and
Institutions, Cambridge University Press. This book summarizes the results of their project to understand the relative
paths of development followed by the US.

Fishback, P., Higgs, R., Libecap, G., Wallis, J., Engerman, S. et al. (2007), Government and the American
Economy: a New History, University of Chicago Press. A highly readable summary of the literature on the role of
government in the American economy from colonial times to 2006.

Fogel, R. (1994), Without Consent or Contract: the Rise and Fall of American Slavery, New York: W. W. Norton
and Company. This is Nobel Laureate Robert Fogel’s summary of the evidence on American slavery generated by
twenty years of debate over his book Time on the Cross, co-authored by Stanley Engerman. There are four
additional volumes of supporting papers.

Goldin, C. and Katz, L. (2008), The Race Between Education and Technology, Cambridge, MA: Belknap Press of
Harvard University Press. Goldin and Katz examine the long-run role played by education in American

Hughes, J. and Cain, L. (2011), American Economic History, New York: Addison Wesley. This is the leading
textbook in American economic history.

Olmstead, A. and Rhode, P. (2008), Creating Abundance: Biological Innovation and American Agricultural
Development, Cambridge University Press.


Acemoglu, D. and Robinson, J. (2012), Why Nations Fail: the Origins of Power, Prosperity, and Poverty, New
York: Crown Business.

Barro, R. and Sala-i-Martin, X. I. (2003), Economic Growth, 2nd edn., Cambridge, MA: MIT Press.

Baten, J. and Blum, M. (2014), ‘Why are you Tall while Others are Short? Agricultural Production and Other
Proximate Determinants of Global Heights’, European Review of Economic History 18, 144–65.

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The Great Depression of the 1930s and the world
economic crisis after 2008

Kevin Hjortshøj O’Rourke

Ever since the Second World War, generations of economic historians have taught their students about the Great
Depression of the 1930s and the lessons that we thought we had learned from it (Friedman and Schwartz 1963,
Temin 1989, Eichengreen 1992). The experience since 2008 has been both reassuring and unsettling for the
profession. Reassuring, because it seems that the lessons of the 1930s still have relevance for today: economic
history is a fruitful source of knowledge about the way the economy works. Unsettling, because so many of the
mistakes that were made in the 1920s and 1930s were made in the first decade of the twenty-first century, and
continue to be made in its second decade.

As always, there are points of both similarity and difference between the two crises. A first point of similarity is
that both crises were preceded by a rapid build-up of debt, and associated bubbles in asset markets. When bubbles
burst, holes were created in the balance sheets of banks, lending and investment came to a grinding halt and private
spending more generally declined sharply as both households and firms attempted to deleverage. The lesson that
financial markets require strict regulation was learned during the Great Depression but forgotten from the 1970s
onwards. Many commentators have speculated that this can be explained by generational shifts, with the
grandchildren or great-grandchildren of those who experienced the Depression first hand forgetting the knowledge
that had been gained so painfully by their ancestors.

When the world economic crisis erupted with a vengeance in 2008, commentators were stunned by the rapidity
of the collapse in economic activity. Figure I3.1 plots monthly indices of world industrial output from the peaks in
1929 (June) and 2008 (April). It shows that the fall in world industrial output was as rapid in the more recent crisis
as in the earlier one, for about a year or so. Figure I3.2 repeats the exercise, this time comparing monthly indices of
world trade in the two periods. Strikingly, the collapse in world trade was far more rapid in 2008–09 than in 1929–

Figure I3.1 World industrial output during two crises (monthly index values, through July 2014)

Source: Eichengreen and O’Rourke (2009), updated.

Figure I3.2 World trade during two crises (monthly index values, through July 2014)

Source: Eichengreen and O’Rourke (2009), updated.

If the magnitude of the initial shock was the same in both cases, the recovery came much earlier in the more
recent crisis, starting after a year or so, rather than only after three or four years. This reflects two lessons that were
learned about how to deal with such a macroeconomic crisis, once it erupts.

The first lesson has to do with the exchange-rate regime, although here the history of how that lesson was
absorbed by policymakers is somewhat complicated. The second lesson has to do with appropriate macroeconomic
policies when faced with a lack of aggregate demand, and mass unemployment.

In the 1920s, the international economy readopted the gold standard, a system which directly linked money
supplies to countries’ gold reserves, and which indirectly implied quasi-fixed exchange rates. Fixed exchange rates
and internationally mobile capital implied that when the US raised interest rates in 1928, other countries also had to
tighten monetary policy, and a deflationary impulse in one country was transmitted across the globe. Worse,
countries like France hoarded gold, forcing even tighter monetary conditions elsewhere. Worst of all, once
recessions had begun, and turned into depressions, neither monetary nor fiscal policy could be used to increase
aggregate demand. Monetary loosening was ruled out directly because of the link with gold reserves. Fiscal
loosening was ruled out because of concerns about government deficits leading to trade deficits and gold outflows,
and even more so because of a ‘gold standard mentality’ which advocated orthodox, conservative macroeconomic
policies in all circumstances, even when they were counterproductive and dangerous (Eichengreen and Temin

Eventually countries were forced to abandon the gold standard, and recovery swiftly followed. Britain was
forced off gold in September 1931, and this was viewed as a catastrophe; but the economy began to recover in 1932.
New and very different political leaders abandoned the gold standard in 1933 in Germany and the US, and their
economies also started recovering. France stayed on gold in 1936, and only started recovering then.

There are several reasons why going off gold led to recovery during this period. Countries going off gold
before the rest benefitted from the increased competitiveness that depreciation gave them, and this was ‘beggar thy
neighbour’ in that one country’s competitiveness gain was another country’s competitiveness loss. More
importantly, however, going off gold meant that countries could loosen monetary policy, which in the long run
meant bigger markets for other countries to export into. Most importantly, according to several authors (Temin
1989, Romer 1992, Eggertsson 2008) going off gold, and signalling in other ways that the policy regime had
definitively shifted away from one based on monetary orthodoxy and pro-cyclical austerity, meant that expectations
of deflation were replaced with expectations of inflation, real interest rates declined and investment and expenditure
on consumer durables increased. Unfortunately these policy shifts came too late to save democracy in Germany,
with tragic consequences for the world.

The two main lessons from the Depression were therefore that flexible exchange rates are preferable to fixed
rates, and that countries need to preserve macroeconomic policy flexibility so as to be able to combat recessions and
stop these from turning into depressions. The exchange rate lesson took a while to be absorbed: policymakers
initially thought that the fluctuating exchange rates that followed the collapse of the gold standard was a problem,
focusing on their beggar thy neighbour implications rather than on their systemically beneficial properties. Since the
1970s, however, the world has moved back to floating, as capital movements made it increasingly difficult to
maintain the fixed exchange rates of the Bretton Woods era (Obstfeld and Taylor 2004).

The result was that when the crisis hit in 2008, the macroeconomic policy response was far superior to that in
1929. Major country interest rates were immediately cut, in many cases almost to zero. Central banks engaged in
large-scale quantitative easing. Automatic stabilizers were allowed to work: fiscal deficits increased, implying that
public demand stepped in to fill the gap left by the private sector. There were even some (relatively small, and often

ill-targeted) attempts at fiscal stimulus. The effects were impressive, as can be seen in Figures I3.1 and I3.2, with
rapid rebounds in production and trade in 2009 and 2010.

There was also a rebound in the Eurozone in 2009 and 2010, in response to these world-wide macroeconomic
stimuli. But then Greece was revealed to have lied about its national accounts and the size of its deficits relative to
GDP, and the European economies switched wholesale to austerity. Something similar happened in 1937, when
monetary and fiscal policy was tightened in the US, and the world went back into recession (as can be seen in
Figures I3.1 and I3.2). Between 2010 and the time of writing (2015), the Eurozone has seen a continual policy of
austerity, with the result that the crisis that started in 2008 dragged on for more than six years, with no apparent end
in sight.

The good news is that economic history can help us to understand why these policies are so destructive. The
bad news is that policymakers have not been listening.


Eggertsson, G. B. (2008), ‘Great Expectations and the End of the Depression’, American Economic Review 98,

Eichengreen, B. J. (1992), Golden Fetters: the Gold Standard and the Great Depression, 1919–1939, Oxford
University Press.

Eichengreen, B. and O’Rourke, K. H. (2009), ‘A Tale of Two Depressions’, in

Eichengreen, B. and Temin, P. (2010), ‘Fetters of gold and paper’, Oxford Review of Economic Policy 26, 370–84.

Friedman, M. and Schwartz, A. J. (1963), A Monetary History of the United States, 1867–1960, Princeton
University Press.

Obstfeld, M. and Taylor, A. M. (2004), Global Capital Markets: Integration, Crisis, and Growth, Cambridge
University Press.

Romer, C. D. (1992), ‘What Ended the Great Depression?’, The Journal of Economic History 52, 757–84.

Temin, P. (1989), Lessons from the Great Depression, Cambridge, MA: MIT Press.


Multi-divisional firms and managerial capitalism

Franco Amatori

At the end of the First World War, the key management characteristic of the large American firm was the unitary-
form (abbreviated as U-form) with an organization based on functions such as production, marketing and finance.
Authority was highly centralized. The difficulty of implementing this type of functional organization was not to be
underestimated as firms were multi-unit entities.

Important organizational changes continued in the 1920s as the role of professional management took on
increasing importance. The appearance of a new form of corporate structure was due to factors within as well as
outside of the firm. Income and aggregate demand in the US was quite expansionary in the 1920s. At the same time,
in certain sectors growth in research and development (R&D) opened the possibility of developing new products
based on the original technologies. Thus was born a process of diversification that could not be managed within the
old organizational framework. Top management was especially disoriented.

The pioneers in solving those problems included DuPont and General Motors. The leaders of these corporations
understood that the problem was multi-faceted and called for a focus on strategy as well as the ability to allow
managers a certain amount of freedom when dealing with their markets. Independent divisions based on product
lines or geographic areas were established. The new divisions had all the lines and staff functions that were
necessary to operate effectively, but now there was an important difference: top management was no longer
occupied in the day-to-day operations. Instead, it concentrated on supervising, coordinating, assessing and allocating
resources for the entire entity. To pursue this strategic role, headquarters had to have a sufficient staff to monitor all
of the divisions.

This new model became known as the multi-divisional form (M-form), which required a greater diffusion of
decision-making powers in the firm. This was generally accepted, but often with initial resistance. The multi-
divisional structure adopted by a few pioneers in the United States in the period between the two wars spread
through the US business system in the 1940s. Then it was adopted by many large firms in other nations that
competed head-on with the United States in the international forum.

But the multi-divisional solution is anything but simple. Henry Ford, probably the greatest entrepreneur of his
time, and a man with an aversion to organizational charts and corporate bureaucracy, was unable to make this
passage. In 1921, Ford was by far the number one manufacturer of automobiles in the world, covering 55.7 per cent
of the US market. General Motors (GM) was a distant second with a 12.3 per cent share. Created in 1908 by an
enthusiastic empire builder – William C. Durant – the foundation of GM was the result of a merger of many
pioneers of the automotive industry in the United States. Unfortunately, Durant’s overly optimistic demand forecasts

left GM with increasing financial difficulties in the 1910s. By 1920, GM’s major shareholder was the chemical giant

DuPont, which decided to appoint Pierre S. DuPont to take over Durant’s role and entrust an executive of the
company, Alfred Sloan, with its operational management. In a short period in the early 1920s, the two transformed
the eclectic mixture of operating units put in place by Durant into a co-ordinated multi-divisional firm. Restructured,
GM soon raced ahead of Ford. In the years between 1927 and 1937 Ford had a loss of $15.9 million while GM’s net
profit in the same years was slightly less than $2 billion. The year 1940 marked the fatal fall: Ford’s share of the
auto market dropped to 18.9 per cent and GM held almost half of the market with its 47.5 per cent. A well-designed
administrative structure was the key component in maintaining a large firm’s competitiveness.

The practice of corporate reorganization was of course more complicated and personalized than the theory of
the M-form suggests. The owners (primarily the DuPont family) pushed for a strict application of the theoretical
model of the multi-divisional firm and, most especially, wanted to exclude the divisional heads from headquarters
and concentrate power in an executive committee made up of top management and a few representatives of the
stock-holders. Some members of the top management – especially Alfred Sloan – were, however, wary of the idea
of completely separating strategic planning from day-to-day operations. In their perspective, the most important
thing was to create consensus within the divisions and to stimulate an entrepreneurial spirit within the ranks of
middle management. To do so, GM’s top executives were expected to involve division managers in strategic
planning as well as in decisions regarding the allocation of resources. The preference was based on a profound sense
of practicality. Top managers understood that the divisions would undoubtedly oppose any kind of initiative
imposed from ‘above’. They also understood the high price the company would pay if such a tactic was pursued and
they were ready to compromise by offering a say in decision-making in exchange for consensus and support.


Chandler, A. D., Jr. (1962), Strategy and Structure: Chapters in the History of the American Industrial Enterprise,
Cambridge, MA: MIT Press.

Drucker, P. F. (1946), Concept of the Corporation, New York: John Day Company.

Freeland, R. F. (2001), The Struggle for the Control of the Modern Corporation: Organizational Change at General
Motors, 1924–1970, Cambridge University Press.


Business history and innovation

Knut Sogner

Apple’s introduction of the iPad gives as good an opportunity as any to define innovation: innovation entails
introducing a new product into the economy. The iPad clearly was a new and distinct product that has established
tablets as a new product group. Yet everything the iPad did could be done through other means such as computers or
mobile phones, only differently. The conceptualization of the product rather than any completely new idea proved to
be crucial. Innovations may be radical and creating new paths, but more often innovation comes incrementally. For
example, the development of the car consisted of many small improvements in various companies over a long period
of time.

Joseph Schumpeter introduced the concept of the entrepreneur as the driving force of innovations. The
entrepreneur was not just a businessman behind a company, but a creator of new concepts within the economy.
Through entrepreneurial activity the economy could find new paths. A famous concept of Schumpeter is ‘creative
destruction’, or how new products or business concepts outcompete old ones. Another saying is ‘add successively as
many mail coaches as you please, you will never get a railway thereby’ (Schumpeter 1934), thus making clear how
radical innovations might be, with all that entailed in terms of creativity. His concept of innovation explains many
phenomena for the second Industrial Revolution (c. 1880–1930) with the coming of large enterprises, a range of new
technologies (electricity, chemical inventions etc.) and products (the light bulb, the car, etc.) and identifiable persons
like Thomas Edison, Henry Ford, Werner von Siemens, Lord Lever and other industrialists.

Schumpeter himself in a later article distinguished between ‘the creative response’ of the entrepreneur and the
assumption within economic models of adaptive behaviour.

In one of the most famous business history books of all time, Alfred D. Chandler describes how large American
enterprises by building managerial hierarchies and using scale and scope advantages were able to introduce new
products at comparatively low prices that appealed to mass markets (Chandler 1977). Chandler’s position was that
he viewed the large corporations as very important to economic growth and development. They were innovative,
with strong competence bases and formidable resources to utilise scale and scope advantages. Schumpeter, too, late
in his life, had come to believe in the innovative strengths of big business (Schumpeter 1942). Innovation could be
institutionalised within the large corporations. The economic crisis of the 1970s, and ensuing turbulent industrial
development in the following decades, was tough for the perception of big business being innovative. The crisis was
also a crisis for the widespread belief in economic development as a gradual, controlled process, something big
business had been seen as a contributor to.

Students of innovation have gradually seen the potential of Schumpeter’s theory of big business being able to
institutionalise innovation, but they have turned the theory on its head. Innovation could be encouraged by the
surroundings of business, the agglomeration, the industrial town (Lundvall 1992). Concepts like ‘systems of
innovation’ and ‘clusters’ indicated how businesses’ competitive advantages were to be found in interactions
between companies and their surroundings, be they universities, government agencies, export organizations etc.
Businesses could learn from each other, and adapting to local conditions could give global competitive advantages.

In business history a particular approach that was called ‘flexible specialisation’ took an almost anti-Chandler
approach (Sabel and Zeitlin 1997). Industrial development, according to the argument, was a localized and
interactive process that current agglomerations such as Silicon Valley in California proved was still very relevant.
The coming of large enterprises to dominate the economy of the twentieth century was, according to this
perspective, to a large extent the result of the use of economic power, not necessarily the result of efficiency and
innovative performances. The Industrial Revolution in Great Britain could also be understood in this light, as an
‘industrial district’, as Alfred Marshall had discussed.1

‘Innovative corporations’, ‘Industrial districts’ and ‘creative individuals’ – there are many approaches to how
business and innovation have developed over time. These approaches need not be mutually exclusive, of course.
Companies and their powerful actions do matter. Surroundings, in providing information, competence and
opportunities also play significant roles framing the possibilities of action. The different roles that individuals can
take do matter. The challenge may be to find the right balance.


1. See for example Lazonick (1991: ch. 5).


Chandler, A. D., Jr. (1977), The Visible Hand. The Managerial Revolution in American Business, Cambridge, MA:

Lazonick, W. (1991), Business Organization and the Myth of the Market Economy, Cambridge University Press.

Lundvall, B. (1992), ‘Introduction’, in B. Lundvall (ed.), National Systems of Innovation. Towards a Theory of
Innovation and Interactive Learning, London: Pinter Publishers.

Sabel, C. F. and Zeitlin, J. (eds.) (1997), Worlds of Possibilities: Flexibility and Mass Production in Western
Industrialization, Cambridge University Press.

Schumpeter, J. A. (1934), The Theory of Economic Development, Harvard University Press.

Schumpeter, J. A. (1942), Capitalism, Socialism and Democracy, New York: Harper and Bros.


Alfred D. Chandler, Jr.: the man behind modern
business history

Franco Amatori

In Western culture, the term ‘BC’ signals one of the most important breaking points in history. Among business
historians, however, it has instead come to mean ‘before Chandler’, when scholars engaged in ideological debates on
‘robber barons’ or busy producing soulless company histories made up the discipline. In those years, business
history was an isolated, peripheral discipline of little interest for economists and the other social sciences.

Alfred D. Chandler, Jr. (1918–2007) started as a historian of the post-Civil War South. During the Second
World War, he served in the US Navy, specializing in photographing enemy targets. He experienced first-hand the
strength of the huge American war machine and acquired an understanding of the importance of large organizations.

After the war, he started graduate studies at Harvard where he listened to the lessons of Talcott Parsons,
defining the sociologist’s lessons as the most stimulating intellectual experience of his life. Then he started to follow
the activities of the Research Center in Entrepreneurial History founded in 1949 by Joseph Schumpeter and Arthur

Chandler was a lucky scholar. When it was time to write his PhD dissertation, he found the sources in the attic
of the family home. In fact, his great grandfather was Henry Varnum Poor who had left an extensive collection of
documents. Poor was an investment advisor who analysed more than one hundred railway companies (the ‘blue
chips’ of his time). From his ancestor, Chandler obtained not only the sources but also the methodology, the
comparative one. To these he added a sharp focus in his research.

Chandler had no intention of studying all aspects of the company; he chose to concentrate on one function,
administration (decisions at the top level and their materialization). In his first major work (Strategy and Structure,
MIT Press, 1962), Chandler took the first fifty companies (by assets) of 1908; then, using the same criteria, he
analysed the top seventy about four decades later. He found that the most successful ones were those that pursued a
strategy of diversification while building up a structure composed of divisions based on products or geographical
areas. They were autonomously facing the market relying on all the company’s functions, but were also coordinated,
evaluated and endowed with resources by huge headquarters that were able to utilize adequate staff. Coordination
by the headquarters was possible because the strategy of diversification was towards related products. In the end,
this multi-divisional company based its cohesiveness on technology. Strategy and Structure can be considered one
of the most innovative economic history books of the twentieth century. But, even more than economic historians, it
was students of management who appreciated the work, making it one of the most read textbooks.

The second defining moment in Chandler’s career was the 1977 publication of The Visible Hand (Harvard
University Press). It examines managers of the early twentieth century who took over many of the tasks of the
Smithian ‘invisible hands’ of the market. But the phenomenon only happened in certain sectors, not in all branches
of the economy. The Visible Hand offers a comparison of sectors. The research question is why after the 1880s did
large corporations emerge in certain sectors and not others? Why beer and not wine? Why cigarettes and not cigars?
Why artificial silk but not silk? For Chandler, the explanation is technology; there were sectors touched by intensive
capital, intensive energy, high-speed production processes and the large batch technology of the Second Industrial
Revolution, while others remained labour intensive and were not affected in the same way. For Chandler, the former
make up the engine of development and are defined as ‘core sectors’; they call for large management intensive
corporations. The latter are defined as ‘peripheral sectors’ where small businesses remain perfectly competitive. To
those who accused him of technological determinism and of undervaluing the power dimension, Chandler
effectively answered that, while this dimension is present in all sectors, only in a few do we find big business
between the end of the nineteenth century and the Second World War.

Scale and Scope (Harvard University Press, 1990) was Chandler’s third major work. A breathtaking
comparison of nations, it picks up where The Visible Hand left off. Chandler emphasizes the need for a heroic firm
rather than the ‘representative firm’ of Alfred Marshall. To reach the goal of turning high fixed costs into low costs-
per-unit, it was necessary to pursue a difficult and painful three-pronged investment in plants at the minimum
efficient scale, in linking production and distribution to make the market more fluid, and in management to govern
the entire ensemble. National peculiarities were based on differing dynamicity of the markets, different regulation of
competition, and the ability to accept the universalistic rules of big business. Chandler has been criticized for being
too focused on the American model. Yet, it is impossible for business historians to ignore his monumental work.


Latin America

Luis Bértola and José Antonio Ocampo

It is difficult to talk about the economic history of Latin America as a whole.1 Latin America is a large world region,
a mixture of countries of different sizes, geography, climate, population, socio-economic structures and factor
endowments. However, the existence of common features in Latin American history is clear: the Iberian colonial
experience, specialization in natural resource-based products and primary export patterns are examples of these
common traits that make it possible to distinguish Latin American countries from other regions and to consider them
as a unit of analysis.

Latin America is not part of what is regarded as the ‘developed world’. None of the countries has attained
uniformly high enough living standards. Even more, some of them are still very poor and have large segments of
their populations on the sidelines of modern economic and social development processes. Even so, Latin America as
a region has made large strides in bringing about very notable economic, social and political changes over the last
decades. These transformations have placed the region on a development path that has enabled it to attain middle-
income status on a global scale.

Despite these changes in most Latin American countries, there are aspects that remain unchanged. The bulk of
the Latin American countries have not been able to leave their natural resource-based production patterns
completely behind them. Their pattern of trade specialization has held them back from gaining access to more
technologically dynamic segments of the global market or segments in which the growth of demand is more robust.
This, coupled with the region’s markedly cyclical access to capital markets, has undercut its development efforts.

Conversely, other countries and regions have been able to leverage their natural resource endowments in ways
that have enabled them to bring about sweeping economic changes. With differing degrees of success at different
stages in their development processes, the United States, Canada, Australia, New Zealand (a group of countries that
we will call, using Maddison’s terminology, the ‘Western offshoots’) and the European Nordic countries provide
examples of countries that have taken advantage of their natural resource endowments to place themselves upon
development paths that have been more successful than those followed by Latin American countries. East Asian
countries that have based their development strategies on their abundant labour supply, which shares some traits
with some areas of Latin America, have been much more successful in achieving sustained economic growth in
recent decades and in improving their population’s quality of life.

The Latin American region’s limited success in terms of economic development has made it especially difficult
for it to sustain broad-coverage welfare policies. This raises the question as to what factors have held Latin America
back from making more radical changes in its economy and society and from doing more to improve its population’s

quality of life. The answers to this question cannot be provided by economic analysis alone. Economic performance

is the outcome of a complex constellation of social, cultural and political relationships and of how those factors
interact with the geographical setting.

Within the realm of development theory, there is a long-standing debate about the role of institutions and about
the ultimate determinants of institutional development. The region’s social structures, the distribution of power and
wealth, the role and strength of its elites and the complex, often painful process of state-building (which in many
cases has resulted in endemically weak nation-states) – in combination with the legacy of colonial times and the
economic and political difficulties that the newly independent states had in positioning themselves on the world
stage – have all been decisive factors and all have something to do with the successes and failures of Latin
America’s economies.

In the following we will first clarify Latin America’s position relative to Western Europe and North America.
We then develop a typology of countries in Latin America that we follow through the painful period of the state-
building (1820–70), the export-led growth period (1870–1929) and the remainder of the twentieth century that was
characterized by state-led industrialization until about 1980, and then by turning back to the market. In the second
large section we will analyze more deeply the obstacles to reaching ‘developed world’ income levels, focusing on
volatility of commodity prices, trade balance issues, education and inequality. Finally, we draw a conclusion about
how Latin America could pursue an industrial and technology policy that avoids previous obstacles to growth.

Latin America in the world economy: convergence and
divergence in per capita GDP

Historical statistics on gross domestic product (GDP) trends in Latin America are quite limited and do not provide
enough evidence to allow us to make categorical statements, especially in regard to the nineteenth and earlier
centuries (see Highlight Chapter 4.1 and 4.2 on early developments). While taking care in assessing these data, it
can nonetheless be said that, over the past two centuries, per capita GDP in Latin America has fluctuated around the
world average while going through three major phases: a decline between Independence and about 1870, although
only relative to the world leaders of the industrialization process (the West); an upward trend in 1870–1980, and
another decline since the 1980s (see Table 4.1). On the other hand, Latin America has far outpaced Africa in terms
of economic growth and continues to do so up to the present day. It also outdistanced Asia until the mid-twentieth
century but, since 1980, just the opposite has been true.

Table 4.1 Per capita GDP, 1500–2008: regional averages and ratio to the world average

1500 1820 1870 1913 1929 1940 1950 1973 1980 1990 2008

Per capita GDP ($)

West 776 1231 2155 4194 5247 5695 6740 13963 15903 19500 26369

Expanded West 702 1102 1877 3671 4590 4991 5642 13067 14950 18750 25285

Rest of the world 538 578 602 859 924 1073 1092 2064 2371 2711 4900

Latin America 416 684 772 1540 2076 1993 2442 4451 5441 5067 7118

Rest (excluding Latin

544 575 599 820 865 1003 962 1804 2038 2453 4670

World 566 672 880 1538 1789 1958 2108 4083 4512 5150 7614


Latin America/West 0.54 0.56 0.36 0.37 0.4 0.35 0.36 0.32 0.34 0.26 0.27

Per capita GDP (world mean=1)

Expanded West 1.24 1.64 2.13 2.39 2.57 2.55 2.68 3.20 3.31 3.64 3.32

Rest of the world 0.95 0.86 0.68 0.56 0.52 0.55 0.52 0.51 0.53 0.53 0.64

Latin America 0.73 1.02 0.88 1.00 1.16 1.02 1.16 1.09 1.21 0.98 0.93

Note: Values are presented in constant 1990 dollars.
‘West’ includes twelve Western European countries, Australia, Canada, United States and New Zealand.
‘Expanded West’ includes thirty Western European countries, Australia, Canada, United States, New Zealand and


Recently, in an effort to understand the uneven economic growth rates of different nations, the concepts of a
‘small divergence’ and a ‘great divergence’ vis-à-vis the industrialized world have come into use. The Western
economies underwent a major transformation as they transitioned from a pattern of slow economic growth between
1500 and 1820 – during which these economies’ expansion was mainly accounted for by the growth of the
population and, to a lesser extent, an increase in per capita GDP – to a different pattern, starting in about 1820, in
which per capita GDP growth was a far more important factor than population growth. During the first of these
periods, the growth pattern of the ‘rest of the world’ was entirely extensive (i.e., driven by population growth) and
was slower than the pace achieved by the West, thereby giving rise to the ‘small divergence’.2 During the second
period, the increase in per capita GDP of the ‘rest of the world’ proved to be, in the long run, no more than a third of
that achieved by the West. This was the origin of the ‘great divergence’.

Even since the time of Independence, Latin America appears to have followed a growth pattern similar to that
of the ‘rest of the world’, with the upswing in its growth rates being driven by the same factors as the rest:
population growth accounts for some 60 per cent of its total economic growth, whereas annual growth rates for per
capita GDP have been only three-quarters of the rates achieved by the West. Between 1820 and 2008, the gap
between Latin America and the West widened from 0.8 to 2.7 times Latin America’s per capita GDP.3

According to Maddison’s highly speculative assumptions, it would seem that there was a substantial gap
between Latin America and the West during the colonial period, although it did not increase to any significant
degree during those years. During the early years of colonization, standards of living and, in particular, life
expectancy at birth plunged. Then, however, the income levels were recovered, with the result that the gap at the end
of the colonial period may not have been much greater than it was at its start.

In sum, while the West’s growth pattern entailed fairly slow rates of increase, the gap with Latin America was
sizeable but was not widening. When the West’s growth pattern changed to one marked by larger productivity gains,
Latin America began to fall further behind and the gap widened to substantial proportions, even though Latin
America’s pace of growth also picked up. Consequently, although the original gap and the legacy of the colonial
period are subjects that attract a great deal of interest, the fact remains that new growth patterns emerged during the
industrial revolution that radically changed the economic landscape and international relations. It would therefore be
difficult to argue that the region’s more recent history is nothing more than a reflection of its colonial past.

A typology for an analysis of the Latin American countries
It is extremely difficult to find a typology for the Latin American countries that provides equally useful insights into
their development process throughout the 200 years that have passed since Independence. One typology may be
more informative in one period but may contribute less to the analysis of another. Despite these difficulties, there are
a number of specific features in the region that have remained in place over time and that even today have retained a
certain explanatory power.

As discussed by Cardoso and Pérez Brignoli (1979), Latin American societies have been shaped by the
interaction of three different societies that came together in the Americas: those of the pre-Columbian indigenous
population, Europe and Africa. Drawing upon the ideas of these authors, who in turn based their work on many
other attempts to construct typologies in this area (Furtado 1976, Sunkel and Paz 1970, Cardoso and Faletto 1971),
we will use the following aspects to establish a typology for the Latin American countries.4

First, there were different ways in which the transition to the kind of wage-based labour market (typical of
modern capitalist economies) was made. Cardoso and Pérez Brignoli (1979) have identified three major types of
transitions. The first type was made by the ‘Indo-European’ regions, where indigenous and mestizo groups
constitute a large portion of the population. Located in what were the major centres of pre-Columbian civilization,
they became pillars of the colonial structure, in which ranching and farming, indigenous campesino communities
and mining activities were all combined. Various forms of forced labour were still in use in these areas until well
into the twentieth century. Another type of transition was seen in the ‘Euro-African’ regions where the development
of a slave labour-based economy and the complex process involved in the abolition of slavery have been pivotal
factors. Finally, the ‘Euro-American’ societies were located in the temperate zones of the Southern Cone, where
European immigration has been the main factor in the growth of the population, or in enclaves within one of the
other two types of societies.

Second, the main type of commodity, particularly in export activities, differed between mining, agriculture or
forestry. In the case of agricultural products, there is an important difference between temperate and tropical
climates, arising by the nature of the production processes and the types of competition or complementarity that
production in these climatic zones entails vis-à-vis buyer markets.5 The capacity of different economies to alter and
diversify their export structure in ways that will increase value added is related to the main type of commodity that
each country produces.

When these two criteria are combined, a powerful typology can be constructed that captures a large part of the
conditions existing in Latin America, especially up to the early decades of the twentieth century (See Table 4.2).

Table 4.2 A simplified typology of Latin American economies


Indo-American Afro-American Euro-American

(1) Subsistence agriculture and mining

(1.1) With strong mining export sector







(1.2) Without strong mining export sector




El Salvador



(2) Tropical agriculture




Dominican Republic



Costa Rica

(3) Temperate-zone agriculture Argentina




(1) A: (except Chile and Venezuela): Bolivia, Colombia, Ecuador, El Salvador, Guatemala, Honduras, Mexico,
Nicaragua, Paraguay and Peru.

(2) Brazil, Costa Rica, Cuba, Dominican Republic, Venezuela, and Panama.

(3) A and C: Argentina, Chile and Uruguay.

Source: Simplied version of Bértola and Ocampo (2012).

From the standpoint of the socio-productive structures, the different countries can be grouped in a simplified
way into three categories: Group 1 where the hacienda, the indigenous communities and mining activities have
predominated in primarily Indo-European societies; Group 2 where tropical plantations have been the predominant
economic activity in what are for the most part Afro-American societies; and Group 3 in which Euro-American
societies based on temperate-zone agriculture or mining have predominated. The word ‘predominant’ has been used
repeatedly because, in each and every case, there is a mixture of these traits.

The long delay: the decades after Independence, 1820–1870
This typology will also be useful as we describe the historical development during the nineteenth and early twentieth
centuries. We can compare the three types of regions with individual country examples. The historical description
provides important insights about how the development obstacles were generated.

During the early nineteenth century, most Latin American countries gained independence from the European
Emperors. Did the first half century of Independence between c. 1820 and 1870 bring about economic growth?
There is actually a debate among historians of Latin America on whether at least some countries developed well
during this period, or whether the whole era between Independence and the ‘first wave of globalization’ should be
interpreted as a long delay in Latin America’s development, caused especially by major conflicts and internal
political instability.6 The aggregate result does not look very good: per capita GDP grew only at an annual rate of
0.2 per cent (Table 4.2a). In contrast, exports per capita grew stronger at around 2 per cent. Using various sources of
information on export share of GDP, we arrive at the conclusion, that per capita output for the domestic market was
virtually flat. Remember that the starting point for these calculations is 1820, when the wars of independence were
coming to a close or were still in full swing. There are evident differences among the per capita GDP growth rates of
the three groups of countries, and these differences are similar, but not identical, to those of per capita exports.
Bértola and Ocampo (2012) found that Group 3, the Southern Cone countries, realized the greatest increase of
exports and it also performed better in terms of per capita GDP, but in the years around 1820, the worst development
was not in Group 1 (countries predominated by Indo-European societies) but rather by the tropical economies that
relied on slave labour (Group 2).

Table 4.2a GDP and export growth during the 1820–70 period

Domestic Exports as % Exports as %

GDP/c growth Export growth market growth of GDP 1830 of GDP 1970

Group 1 0 1.4 −0.1 3 5

Colombia 0.1 0.4 0.1 2 3

Mexico −0.2 1 −0.3 3 6

Group 2 0.4 2 0.3 6 12

Brazil 0.3 1.9 0.1 7 15

Cuba 0.9 2.1 0.9 5 9

Venezuela 0.4 1.7 0.3 10 18

Group 3 1.2 2.5 0.9 13 24

Argentina 0.8 1.9 0.6 12 20

Chile 1.3 3.2 0.8 12 31

Total 0.2 2 0.1 5 13

Around 1870, the per capita GDP of Group 3 was more than double that of Group 1, whereas the difference had
amounted to just 16 per cent in 1820 (Table 4.3). Another important difference was that the tropical economies grew
more swiftly than those in Group 1, with the result that, by 1870, Group 1 ranked last, although it was not far behind
Group 2 (countries predominated by Afro-American societies).

Table 4.3 Per capita GDP in Latin America, 1820–2010 (in 1990 international Geary-Khamis dollars)

1820 1870 1913 1929 1940 1950 1973 1980 1990 2010

Argentina 998 1468 3962 4557 4342 5204 7966 8367 6433 11820

Bolivia 2045 2604 2695 2197 2987

Brazil 597 694 758 1051 1154 1544 3758 5178 4920 6762

Chile 710 1320 3058 3536 3312 3755 4957 5660 6401 13229

Colombia 607 676 845 1589 1868 2161 3546 4244 4826 6982

Costa Rica 1555 1733 1930 4230 4902 4747 7876

Cuba 695 1065 2327 1688 1244 2108 2313 2724 2957 3997

Ecuador 815 1055 1109 1607 3258 4109 3903 5278

El Salvador 1216 1298 1739 2653 2454 2119 3447

Guatemala 1613 2571 1955 3140 3772 3240 4172

Honduras 1544 1195 1353 1715 1971 1857 2464

Mexico 733 651 1672 1696 1788 2283 4831 6164 6085 7832

Nicaragua 1694 1328 1564 2813 2095 1437 1889

Panama 1854 4068 4824 4466 9198

Paraguay 1569 1419 2015 3218 3281 3819

Peru 840 1024 1892 1895 2289 4001 4248 3008 5844

Dominican Republic 1071 1982 2403 2471 5361

Uruguay 2106 3197 3716 3536 4501 5034 6630 6465 11706

Venezuela 460 570 1010 2813 2879 5310 9788 10213 8313 9434

Average 683 790 1559 1956 1993 2442 4451 5441 5067 7272

Average ‘West’ 1231 2155 4194 5247 5695 6740 13963 15903 19500 27356

Weighted average by groups

Group 1 713 692 1373 1963 1780 2220 4163 5072 4890 6674

Group 2 588 727 906 1270 1351 1855 4134 5392 5054 6935

Group 3 832 1461 3673 4276 4065 4801 6964 7540 6426 12204

Medium-sized and
1071 1426 1551 2035 4379 5585 5307 7193

large countries

Small countries 1663 2779 3204 2941 4398


LA average/‘West’ 0.55 0.37 0.37 0.37 0.35 0.36 0.32 0.34 0.26 0.27

Group 1/West 0.58 0.32 0.33 0.37 0.31 0.33 0.3 0.32 0.25 0.24

Group 2/West 0.48 0.34 0.22 0.24 0.24 0.28 0.3 0.34 0.26 0.25

Group 3/West 0.68 0.68 0.88 0.81 0.71 0.71 0.5 0.47 0.33 0.45

Medium-sized and
large countries/West

0.26 0.27 0.27 0.3 0.31 0.35 0.27 0.26


0.25 0.2 0.2 0.15 0.16

Coefficient of
variation (LA7)

0.24 0.39 0.63 0.52 0.5 0.49 0.5 0.41 0.29 0.37

Coefficient of
variation (LA19)

0.53 0.46 0.4 0.38 0.46

Group 1 includes Bolivia, Colombia, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Paraguay

and Peru.
Group 2 includes Brazil, Costa Rica, Cuba, Dominican Republic, Venezuela and Panama.
Group 3 includes Argentina, Chile and Uruguay.
The group of medium and large countries consists of Brazil, Colombia, Mexico, Peru and Venezuela.
The group of small countries consists of Bolivia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras,

Nicaragua, Panama, Paraguay and Dominican Republic.
‘West’ includes twelve Western European countries, Australia, Canada, United States and New Zealand.
LA7 refers to the seven largest Latin American economies.
LA19 refers to all Latin American countries in the sample.

Source: modified from Bértola and Ocampo (2012).

Tracing the development of the Latin American countries during this early period, it can be informative to
compare GDP estimates with other welfare indicators. The idea that decades following Independence were featured

by slow growth and even stagnation is reinforced by anthropometric data (see Figure 4.1). Both in Argentina and
Peru, average male stature was lower by the 1870s than at the eve of the colonial period. In Brazil, a stagnating trend
is first and slightly reverted after the 1850s.

Figure 4.1 Height development in selected Latin American countries during the nineteenth century (male height)

Source: based on Baten and Blum (2014).

We will now focus on four country examples (Peru, Mexico, Brazil, Colombia) to explain the difficult situation
of the 1820–70 development phase. Peru is a good example of Group 1, and also an example of the central areas of
the colonial economy. In 1820, Peru’s population was more than two and a half times larger than Argentina’s. The
Peruvian economy had a large silver mining sector and a vast campesino-based sector which was heavily
concentrated in subsistence agriculture and produced very little surplus for sale on the market (or, at least, for other
than strictly local markets; see also Map 4.1). Peru was one of the countries in which the local elites remained loyal
to the Crown. There, the War of Independence was a bloody struggle, and the emerging independent government
took political and economic reprisals against the royalists and the local elites who had supported them. The Peruvian
economy suffered grievously from the collapse of the silver mines. The average output for 1830–70 was 87 per cent
of what it had been in 1800 (based on Contreras 2004, Table 4.1). Exports were also flat until the early 1840s, prior
to the guano boom, despite the fact that the production diversified into cotton, wool and saltpetre.

Map 4.1 Regional economic specialization in Latin America in the nineteenth century

Source: see map 1.1.

The decline of the silver-based economy dampened production activity in the haciendas that provided inputs for
that sector, and these haciendas became increasingly self-reliant, a tendency that was heightened by a highly radical
form of protectionism. In their turn, the main export activities of the coastal areas were hit by the dissolution of the
slave-labour system on which they were based (Gootenberg 1989). This downward economic slide was interrupted
by the boom in the guano trade (a typical case of the ‘commodity lottery’), which had a huge impact on the Peruvian
economy. The country’s exports jumped by a factor of seven between 1845 and 1860, and guano accounted for over
50 per cent of total exports in the latter year (Contreras and Cueto 2004: 116).

Mexico’s (Group 1) short recovery after the War of Independence was soon cut short again by the civil wars
and institutional instability of the 1850s, which lasted until the government of Porfirio Díaz reestablished conditions
that paved the way for economic growth (Sánchez Santiró 2009b). The conflicts that arose from the mid-1850s had a
profound effect because they were widespread and made themselves perceptible in the vast rural areas of the
countries, involved clashes between castes, different ethnic groups and haciendas, and entailed a deepening of the
political and ideological divisions between radical liberals and conservatives, which was mixed, in turn, with the
division between republicans and monarchists (Sánchez Santiró 2009a: 102–03).

The situation in Brazil (Group 2) 1820–72 was also a combination of stagnation and regional diversity.
According to Leff (1982, 1997), from the time of Brazil’s independence in 1822, its rate of GDP growth failed to
outpace its population growth. Thus, while the population did expand at a rapid pace (nearly 2 per cent per annum),
the country’s efforts to improve its performance in per capita terms were largely frustrating until the start of the
twentieth century. This protracted and very difficult period of stagnation was, however, the net result of widely
varying trends in different regions of the country. The north-eastern part of Brazil, which was a platform for sugar
and cotton exports and which accounted for 57 per cent of the country’s exports at the start of this period, saw a
steady decline in its external sales (Map 4.2). In 1866–70, these crops represented just 30 per cent of exports, while
the share of coffee exports – the leading product in the south-eastern portion of the country – jumped from 26 to 47
per cent (author’s estimates; Mitchell 2003).

Map 4.2 Exports of Latin America around 1900

Source: see map 2.1.

Leff (1982, 1997) explains the decline experienced in the north-east in terms of Dutch disease. As coffee
exports came to play a greater role in the foreign exchange market, the real exchange rate increasingly reflected the

importance of that product, which had a negative impact on the less competitive regions, such as the north-east. It
was neither possible to restructure the sugar industry very quickly, nor easy to promote large-scale inter-regional
migration flows, although a large number of slaves did move from the north-east to the south-east. Throughout this
period, the expansion of the coffee industry was not hindered by any increase in labour costs, since up to 1852 (end
of the slave trade), wages were depressed by the presence of slave labour and later by subsidized immigration flows,
particularly from Italy (Leff 1997: 35). This strengthened the existing pattern in Brazil: an export sector that
generated high levels of earnings alongside a large sector that catered to the domestic market and a large subsistence
economy, both with very low levels of productivity, with the outcome being low per capita income levels but a high
export coefficient relative to the other Latin American economies.

Ocampo (1984, 1990) and Kalmanovitz and López Rivera (2009) indicate that Colombia (Group 2) underwent
an economic contraction during the War of Independence that was followed by a period of stagnation, which lasted
until around 1850. This was the time of the collapse of gold production along the Pacific coast, which was based on
slave labour, but it was also a crisis period for the main colonial port, Cartagena, and the crafts-producing region of
Santander. These years were, however, followed by a growth spurt that lasted from the middle of the century until
the early 1880s. This expansion was fuelled by the diversification of exports which, despite their volatility, gave a
boost to economic activity in different regions of the country. Very short boom-bust cycles were experienced in a
diverse array of new exports such as tobacco, cotton, indigo, cinchona bark and other forestry products, as well as
coffee, which was eventually to become a longer-lasting export crop. In some regions, this growth period began
soon after Independence was won. This was particularly the case of Antioquia, where gold production, which had
expanded there in the eighteenth century, continued and was turned into a more modern business venture. A long-
term improvement in its terms of trade also helped its economic recovery along.

However, in spite of promising regional developments the average growth rates were disappointing. What were
the reasons for the difficulties? One of the main reasons was the challenge to build and consolidate the new nation
states. This in turn was caused by the weakness of the local elites, which was one of the legacies of the colonial
period. In addition, there were severe obstacles against the introduction of liberal reforms that might have improved
the growth records. Especially the regions in which the elites considered slavery as economically necessary, such as
Brazil’s north-east and other regions, the idea of liberal reforms met strong resistance.

In sum, in the early years of Independence Latin America experienced a difficult development. The new
freedom certainly allowed rapid institutional change, as the Latin American countries became republics. Some of
them experienced rapid population growth, especially those of Group 3, the Southern Cone countries. Argentina
could be mentioned as an example of a Group 3 country, but in the beginning there was not a united Argentina. Also
the economic development was very different: strong initial decline in the north-west and around Córdoba, and
expansion in the Buenos Aires region (Bértola and Ocampo 2012). The experience of welfare and income
development during this period was in general quite mixed. It is actually unclear yet whether the 1820–70 period
brought at least a modest income growth and whether it was also characterized by slightly improving welfare.
Relative to Europe and North America, Latin America clearly fell back: between 1820 and 1870, the per capita GDP
gap between Latin America and the West swelled from 0.8 to 1.8 times the level of the former.

Export-led growth during the first globalization boom (1870–

During the final third of the nineteenth century, Latin America embarked on a fairly rapid growth path that allowed
it to distance itself from Africa and Asia while more or less keeping up with developed nations. It is important to
understand this history of quite successful export-led growth in order to address the basic question of this chapter –
namely why Latin America did not change its resource-based economic strategy during the twentieth century. At the
same time, Latin America was becoming a region of greater inequalities both between and within countries.

The growth of the population, as in earlier periods, was uneven. The countries that witnessed the sharpest
growth were, once again, those in Group 3 (recently settled areas), whereas the Group 1 countries, the traditional
centres of the colonial economy and the regions where the economic activity of the haciendas, campesinos and
mining operations had held sway, experienced slower population growth. Nonetheless, as of 1929 these regions still
accounted for 40 per cent of the region’s total population. The population in the Group 2 countries expanded more
swiftly and outnumbered the population of Group 3 by the end of this period. In fact, while Group 3 had registered
the highest growth rate for an entire century, by 1929 it represented just 17.5 per cent of the region’s total

Argentina and Brazil were the main destinations for European labour. Entrepreneurs and technicians coming
from Europe were also important in countries that did not receive massive flows of migrants. Migrants from Asia,
and especially from China and India, headed for the plantations of Cuba and Peru, where they worked as indentured
labourers. There were also intraregional migration flows, which included the movement of black labourers from the
Antilles who went to work on the banana plantations of Central America, the Cuban sugar-cane plantations and the
construction of the Panama Canal.

Exports soared between 1870–74 and 1925–29 at an annual rate of 4.2 per cent at constant prices. This forceful
expansion of Latin American trade was part of a powerful and more general increase in world trade in which, during
certain periods, Latin America was one of the winners. The most striking upswing in exports was experienced in
Argentina between the 1870s and the start of the First World War. As time went by, however, all the countries
benefitted from the region’s increasing integration into the world economy (see Map 4.2 for some of the main export
products). Even so, the performance of the different groups of countries was very uneven. Up to 1913, the Group 3
countries continued to outpace the others. If the rates are calculated in per capita terms, however, then Group 1
(whose population grew very slowly during those years) edged past it. The growth of Group 2, dominated by Brazil
and Venezuela, was more sluggish, especially in per capita terms.

Until about 1913, the degree of inequality among the Latin American countries increased as part of a tendency
that, according to Gelman (2011), had begun at around the time that the countries were winning their independence.
Argentina and Uruguay had high income levels from early on and, by 1870, Chile and Cuba had joined the ranks of
the high-income countries. Table 4.3 shows that since Independence and until 1913, but especially between 1870
and 1913, the disparities between different Latin American countries were on the rise, as illustrated by the
coefficient for the variation in per capita income levels. The increasing divergence that arose between the time of
Independence and 1913 is largely a result of the strong growth of the Group 3 countries, which had achieved income

levels that were quite close to the average for what is today considered the developed world, while Group 1 and 2
were growing very slowly.

The GDP per capita levels of Latin American countries became more similar after around 1913. This
convergence of incomes was a net effect of different factors. On the one hand the growth of the economies of the
Southern Cone began to flag, moving them away from the income levels existing in the West, at first at a moderate
pace, but then, from the 1950s on (when the developed economies were experiencing a golden age), much more
rapidly. The historical trends in Cuba have been even more adverse, moving continuously from its ranking as the
economy with the fourth-highest per capita income level in the region in 1913 to one of the lowest-ranking countries
now. On the other hand, the convergence of the Latin American economies was due to the strong performance of
medium-sized and large countries other than those of the Southern Cone. In sum, the 1870–1929 period was quite
successful for Latin America. Some of its economies reached income levels that were quite close to Western
European ones. However, this high income was based on commodity exports, which became a big problem in the
deglobalization period of the 1930s and 1940s. This in turn motivated Latin America to move away from the global
market and try out a state-led industrialization policy in the following period.

How did Latin America develop during the twentieth century
relative to the rest of the world?

Overall, between 1870 and 1980, in very different contexts and with some fluctuations, Latin America improved its
global ranking, in contrast to the decline registered by the ‘rest of the world’ up to the mid-twentieth century. What
is more, Latin America’s share of world output climbed steadily, rising from 2.6 per cent in 1870 to 5.2 per cent in
1929 and to 9.5 per cent in 1980 (see the last row in Table 4.1). Even so, the region was unable to narrow the gap
with the West, which remained fairly stable during this period and actually widened somewhat during some years,
especially between 1950 and 1973, when the Western economies marked up record-breaking growth rates during
what was known as the ‘golden age’ of capitalism.

Since 1980, Latin America has not only been lagging further behind the developed economies, but has also lost
ground vis-à-vis the world average. While many nations, especially in Asia, have joined others on a rapid economic
growth path, Latin America has grown at a substantially slower pace. As a result, the region’s share of world output
slipped from 9.5 per cent in 1980 to 7.8 per cent in 2008.

Analysis: convergence/divergence cycles, financial crises and

After describing some of the main characteristics of Latin American development over the past two centuries, we
now turn to a deeper analysis. Two major interrelated factors lie behind the trends of convergence and divergence.
The first is the existence of periods of burgeoning growth in some Latin American countries that have reduced the
income gap vis-à-vis developed countries but have not been able to sustain the convergence. The other factor is the
high levels of volatility of growth rates displayed by all the countries of the region. Experiences at the international
level seem to indicate that when economic growth surges, its volatility increases as well. This may be due to the
nature of international trade cycles, business cycles, population shifts and international migration, fluctuations in
capital flows and even the transition from one style and pattern of technological change to another. But, as shown
above, the volatility of the Latin American economies exceeds the norm: the coefficient of variation was 2.63 in
1961–2008, much higher than in the world total (0.42), in the Organization for Economic Cooperation and
Development (OECD) countries (0.49) and the low-income countries (0.45).7

It is difficult to gauge how much of the sluggishness of the Latin American economies is associated with this
factor. A high degree of volatility brings consequences with it in terms of social, corporate, institutional and political
stability and the possibility of planning medium- and long-term investments. This situation is compounded by
procyclical fiscal and macroeconomic policies, which have tended to exacerbate, rather than dampen, other shocks
that adversely affect production activity (Kaminsky et al. 2004, Ocampo and Vos 2008).

One significant aspect of Latin America’s economic volatility has to do with its position in the international
economy. Latin American countries have relied primarily on their natural resources as a means of positioning
themselves in the global economy. This strategy seems quite understandable as exporting national resource-intensive
commodities brought enormous growth for some countries in the 1870–1929 period, as we saw above. But the
supply and demand for these resources have been subject to fluctuation, and the prices that they bring have been
extremely volatile. In addition, the fact that these countries’ production structures are concentrated in a relatively
small number of commodities makes them more vulnerable to changes in demand and price.

The procyclical nature of international capital flows to developing countries also contributes to this excessive
volatility. This was pointed out by Triffin (1968) in respect of the first wave of globalization and was also identified
during the second (Ocampo 2008). As a result, when international trade has had positive growth effects, economic
activity has been boosted further by capital inflows. On the other hand, when the international business cycle enters
into a downturn, the effects of the slump in the demand for commodities and in commodity prices are amplified by
the sudden stop and even the reversal of capital flows.

The level of volatility has fluctuated and was particularly high during the interwar period of the twentieth
century (see Bértola and Ocampo 2012: Table A.3). There has been no downward trend since then. Table 4.4 shows
that there is no clear-cut correlation between average income levels and the degree of volatility (the correlation
coefficient is only 0.013).

Table 4.4 Determinants of volatility, 1870–2008

Total Volatility (%) Share of the first Average per capita GDP

product (%)

Argentina 6.90 23 5,129

Brazil 5.40 54 2,170

Chile 7.40 40 4,156

Colombia 2.90 49 2,320

Costa Rica 5.90 53 3,449

Cuba 11.60 77 1,866

El Salvador 6.70 70 1,994

Guatemala 7.90 64 2,613

Honduras 5.40 43 1,604

Mexico 4.80 31 3,500

Nicaragua 9.00 40 1,797

Peru 5.60 29 2,548

Uruguay 7.40 38 4,240

Venezuela 8.40 63 4,408

Correlation coefficient 0.441 0.013

Note: the correlation coefficient is calculated as the cross-correlation between the variables and total volatility.

Source: calculated from Bértola and Ocampo (2012).

Another aspect of volatility is the frequency and severity of financial crises. The upper part of Figure 4.2
depicts the historical variations in the frequency of financial crises. In every case, the peaks follow periods of hefty
capital inflows that had their origin, as has been analysed in a vast amount of the literature, in what are essentially
international business cycles: the boom in external financing that followed Independence, the boom that preceded
the international crisis of 1873, the Great Depression of the 1930s, the Latin American debt crisis of the 1980s and
the new series of crises in the developing world that began in East Asia in 1997, with the last two of these crises
merging into what can be seen as a single long, drawn-out crisis.8 These crises enveloped almost all the Latin
American countries (and, in some cases, all nineteen of them) in one way or another.9 Only two of the major
international financial booms have not been followed by financial crises in the region: the boom that preceded the
First World War, and the one that gave way to the severe worldwide recession of 2008–09. In both cases, however,
the booms were followed by regional recessions.

The lower part of Figure 4.2 shows how the composition of these crises changed over time. Debt crises have
been the most common problem in Latin America since Independence. Steep devaluations associated with balance-
of-payments crises have been frequent since the First World War, and this situation was also the main factor behind

the crises that occurred between the mid-1950s and mid-1960s, which were not preceded by a boom in external
financing. Finally, the most recent type of crisis has been in the banking sector, and these crises have become
increasingly frequent since the 1980s. As a result, since the 1930s, most crises have been ‘dual’ (combined debt and
balance-of-payments crises) and, since the 1980s, many of them have been triple crises (the above two plus banking
crises). Actually, in recent decades, we should also add in a number of other dimensions, such as high inflation
(which, in Latin America, has historically been closely correlated with balance-of-payments crises), balance-of-

payments collapses and, in fewer cases, domestic debt crises.10

Figure 4.2 Economic crises of Latin America, 1820–2008
Notes: the definition of crisis according to Reinhart and Rogoff is the following: currency crisis: annual
devaluation greater than (or equal) 15 per cent with respect to the US dollar (or the relevant currency); external
debt crises: outright default on payment of debt obligations including principal or interest; banking crisis: bank
run that leads to the closure, merging, or takeover by the public sector of one or more financial institutions. If
there are no runs, the closure, merging, takeover, or large-scale government assistance of an important financial
institution (or group of institutions) that marks the start of a string of similar outcomes for other financial

Source: Database of Reinhart and Rogoff (2009) kindly provided by the authors.

There has also been a notable degree of convergence between external trade cycles and capital flows. Crises are
usually triggered by sudden export collapses that occur in the midst of critical international conjunctures (1873,
1890, 1913, 1929, 1973, 1979, 1997, 2008) and that also lead to plummeting commodity prices, which in turn
translate into trade deficits. More often than not, these crises coincide with a contraction in the supply of external
financing, which is usually abundant when exports are on the rise.

Integration into the world economy: volatility of commodity

One hypothesis is that volatility is brought about by external factors – either fluctuations in external markets or
fluctuations in the terms of trade of each country.11 Did the fluctuations occurring in those parts of the world (the
‘relevant world’) that have an impact on Latin America via its exports and its terms of trade matter?12 It is important
to note that Latin America experiences more volatility than its ‘relevant world’ does, and the terms of trade appear to
be the factor that transmits greater volatility to the region. Table 4.4 indicates that there is a fairly close correlation
between volatility and export product concentration (correlation coefficient is 0.44). Table 4.5 provides evidence of
the extreme concentration in a very few product categories that has characterized the Latin American economies
throughout their history.

Table 4.5 Export concentration: share of total exports (%), 1870–1973

Top export product

Country 1870–73 1910–13 1926–29 1949–52 1970–73

Argentina 41 21 22 7 26

Brazil 53 52 71 63 29

Chile 52 31 46 5 64

Colombia 8 45 65 74 54

Costa Rica 86 37 61 43 37

Cuba n.d 71 79 81 75

El Salvador n.d 76 74 83 45

Guatemala 65 69 79 77 32

Honduras n.d 12 44 65 50

Mexico 85 22 23 19 8

Nicaragua n.d 48 54 33 24

Peru 33 18 34 32 18

Uruguay 35 40 33 47 36

Venezuela 42 49 69 92 n.d.

Average 50 42 54 52 38

1) Top three export products

Argentina 74 50 56 19 46

Brazil 82 77 76 78 41

Chile n.d 34 77 7 67

Colombia 14 47 82 90 69

Costa Rica n.d 69 92 74 70

Cuba n.d 92 92 5 90

El Salvador n.d n.d n.d n.d 62

Guatemala n.d n.d n.d n.d 51

Honduras n.d 14 46 73 68

Mexico 91 31 49 38 18

Nicaragua n.d 56 69 1 53

Peru 57 36 71 56 30

Uruguay 76 69 77 78 63

Venezuela n.d n.d 89 94 n.d.

Average 66 52 73 51 56

Source: calculated from Mitchell (2003).

The specialization pattern of Latin America has been a subject of debate for many years. In the long tradition of
the structuralist school of thought, it has been seen as the main reason for the region’s failure to grow more rapidly.
If we look at growth trends over the last three decades, it becomes clear that the fastest-growing economies in the
developing world have been those that have diversified their production and, in particular, have increased high-
technology manufacturing exports (Hausmann et al. 2007; Ocampo et al. 2009).

The first wave of globalization came at a time when world trade was based on an exchange of raw materials
and food products for manufactures. At that point, Latin America was in a good position, given its pattern of
specialization. A collapse of the international division of labour followed in the period 1914–45. After the Second
World War, intra-industry trade among developed countries dominated. In addition, protectionism was strong
against agricultural products and textiles coming from the developing world. In this setting, and given the biases
generated by industrialization policies, Latin America’s share of world trade sank to a level three percentage points
lower than it had been during the boom of the 1920s. When the second wave of globalization began to open up more
export opportunities for developing countries in the 1960s, and when Latin American countries began to shift their
economic policies towards an emphasis on export growth in the closing decades of the twentieth century, the region
was able to regain some of the ground that it had lost, but it was still far removed from the levels that it had reached
during the first globalization wave.

Trends in the terms of trade
The trend in the terms of trade for commodities relative to manufactures is an important factor to consider. Starting
in the late nineteenth century, but especially during the boom that preceded the First World War, the real prices of
agricultural and mineral products trended upward (see Figure 4.3). Then, in the aftermath of the First World War
this trend began to reverse, not continuously but in stages (or as the downward phases in long-term cycles). The first
strong reduction came in the 1920s and covered all commodities. The second took place in the 1980s and 1990s and
was characterized by a sharp drop in the prices of agricultural goods and a more moderate one in mining products.
As a result, between the decade leading up to the First World War and 1998–2003, the terms of trade for
commodities (other than oil) fell by 60 per cent, with tropical agricultural products being the hardest-hit and mineral
products being affected the least. Real oil prices also fell, but that decrease came later than the drop in non-oil
commodity prices (the 1930s and 1940s) and, although they also plunged in the 1980s, they maintained a substantial
part of the ground gained during the two oil shocks of the 1970s. The commodity price boom that began in 2004,
which was driven by demand from China and was stronger in mining and energy products than in agricultural goods,
has prompted many people to think that the world may be returning to the patterns observed during the first wave of

Figure 4.3 Real commodity prices (1980 = 100)

Source: Ocampo and Parra (2010) and updates for 2010.

The deeper long-term downturn in tropical goods prices gives us reason to take a serious look at one of the
versions of the famous Prebisch-Singer thesis about the terms of trade.13 This version emphasizes stark structural
and institutional differences between the manufacturing sector in industrial countries and the production of tropical

goods sectors in more backward regions. In the latter, labour tends to be in ample supply and the history of the
labour market institutions has been one of forced labour and very weak unionization. In the industrial countries,
workers have often been better organized than in tropical goods countries.

According to Lewis (1969, 1983), international migration tended to be segmented into two different types of
flows: European labourers migrated to new settlement areas of non-tropic climate such as in the Southern Cone
countries, and Chinese and Indian workers went to tropical zones. Bértola and Williamson (2006) have underlined
the fact that, unlike the temperate zone, new settlement countries elsewhere in the region, tropical Latin American
areas have had to compete internationally with countries of low per capita incomes and extremely low wage levels.
Especially low-wage tropical countries in Asia and Africa were the competitors of the Brazilian and the Caribbean

An adjusted version of the Prebisch-Singer thesis suggests that world-wide demand shifts toward higher-quality
products caused substantial problems for Latin America. The industrialization process that firstly took place in
Europe and North America was based on products that were highly demanded at higher income levels. It was
followed by an expansion of the share of services sectors; again the products were compatible with rising income. In
contrast, the demand for Latin American products did not always increase at the same pace as income. Until the First
World War, rising income levels in Europe and the United States were still favourable for Latin America. Meat and
wheat were still highly demanded and Europe’s poor labourers consumed Argentinean wheat and beef instead of
other, less nutritional products. In other words, the income elasticity of demand for these goods was high in this last
period.14 However, once this ‘dietary transition’ had been made, the demand curve began to display a low income
elasticity, as apparently occurred in the European countries after the 1920s. In periods of income growth consumers
did not demand proportionally more Latin American commodities anymore.15

The trade balance
What would happen if Latin American consumers and firms at higher income levels demanded more and more
foreign products but foreign markets did not proportionally demand more Latin American products (at also higher
income levels)? In such a situation, Latin America would run into difficulties of the balance of payments. Structural
changes would be needed in such a situation: only if Latin America started to produce other products – namely those
with higher income elasticity in foreign markets – the balance of payment problems could be avoided and higher
growth rates could be achieved. In this vein, and according to the theory devised by the Economic Commission for
Latin America and the Caribbean (ECLAC), the fundamental problem of commodity exporters is that the income
elasticity of the demand for imports to Latin America will inevitably be higher than the income elasticity of the
demand of their exports abroad.16 If structural change towards other economic sectors was insufficient, there would
be a long-standing tendency to run trade deficits. The economy’s growth rate will be determined by its relative
propensities to export and import.

Estimates of long-term growth fit in very well with a simple model that explains growth based on the
relationship between the income elasticity of demand for exports and imports (Bértola and Porcile 2006). In the
aggregate, Latin America’s per capita GDP relative to that of the West dropped from 36 per cent in 1870 to 27 per
cent in 2008. The relative income elasticity factor (assuming no structural change) may account for the overall drop
in Latin America’s GDP from 36 per cent to 31 per cent. The remaining four percentage points of the decrease can
be accounted for by other factors, such as a decline in the terms of trade, over-indebtedness, or even population

Education and human capital
Latin America as a whole has made significant efforts to bring about improvements in the population’s level of
education. However, when viewed from a comparative vantage point, those efforts seem to have come too little and
too late, and the region has been at a clear disadvantage relative to other regions. This could be another factor
explaining why the convergence to Europe and North America was not complete.

Around 2000, Latin America’s population had completed an average of 7.1 years of schooling, whereas the
populations of the four countries that have dominated the world scene over the last two centuries (France, Germany,
the United Kingdom and the United States) had completed an average of 12.5. This means that the region’s level of
education as of the year 2000 was 59 per cent of the developed countries’ level. However, if we look at Latin
America’s performance during the twentieth century, it becomes clear that it has made a great deal of progress. In
fact, at the start of the twentieth century, the region’s population had completed, on average, just 1.5 years of
schooling (one quarter of the population of the developed countries mentioned above).

Higher educational levels are associated with higher GDP per capita values (Figure 4.4). However, Figure 4.4
shows that Latin America stands out compared to other countries in the sense that, for any given level of per capita
income, its level of education is lower than that of other regions. The main explanations that have been advanced for
this phenomenon have to do with social structures and power relations. The education system that was set up during
colonial times was designed to preserve and legitimize the existing social order. A more modern system of education
emerged in Latin America in association with other processes, the most important of which was the creation of
independent states. This was accompanied by the appearance of new political parties, the emergence of
entrepreneurs, as well as internal and foreign migration. All of this fuelled rapid progress in the creation of education
systems, the gradual universalization of primary education and the narrowing of the educational gap between men
and women. Nevertheless, as pointed out by Reimers (2006), these processes were all imprinted with a very basic
division between those who advocated a democratic, inclusive form of education and those who crafted hierarchical,
authoritarian social structures that went hand in hand with a high degree of social exclusion.

Figure 4.4 Latin America and the West, 1870–1930: per capita GDP (1990 PPP US dollars – x-axis) and average
years of education of population aged 15 and above (y-axis)

Source: based on Bértola, Hernández and Siniscalchi (2010).

Frankema (2009), along with other authors, has looked for a relationship between the development of the
education system and the concentration of land ownership. Large landholders are not in favour of educating the
workforce because they fear that education will build workers’ capacities and thus their political power and because
they are more inclined to make use of unskilled labour than to use education as a means of boosting productivity.

Lindert (2010) has recently described how the concentration of political power, the concentration of wealth and
low levels of education are linked to one another. He also attempts to account for what he calls ‘education
anomalies’ (countries with higher incomes but worse education systems than others) by analysing their tax systems
and looking at how fervently opposed high-income sectors are to paying taxes to finance the cost of universal public

There is another line of thought that complements this interpretation. Latin America’s traditional export pattern
shows that the predominant component consists of commodity exports that incorporate relatively low levels of value
added but that nonetheless do generate economic rents. This would be the main factor underlying its tendency to
have a high level of per capita income relative to its endowment of human capital as measured by levels of

It is well known that Latin America is the region with the highest levels of income inequality in the world, which is
why there has been so much interest in inequality studies in recent years. One of the main questions to be asked is:
to what extent does the existence of inequality help to account for the region’s relative backwardness? Another
question is: to what extent is this characteristic a result of the region’s particular style of development?

Most of the inequality research done on and in Latin America in the 1950s, 1960s and 1970s (with, in the
second case, the structuralist school of thought leading the way) stressed the importance of the oligarchic aspects of
Latin American development, which were manifested in the concentration of political power, wealth and income in
elite groups of landowners and financiers who controlled labour relations and trade. The first wave of globalization
was associated with the consolidation of the state’s political power and a heavy concentration of wealth, along with
a stauncher defence of the elites’ property rights. The countries that were relying on immigration from Europe were
a softer version of the latter rule.

These new elements had their roots in the region’s colonial legacy. These new types of relations played out in
different spheres, however, owing to the interaction of powerful international forces (the industrial revolution, the
independence of the United States, the outcome of the Napoleonic wars) that influenced the liberal reform
movement in Latin America.

Neo-institutional theorists have revived this older tradition of research (although they generally ignore the older
Latin American structuralist literature), arguing that the institutions set up by the colonial powers immediately
following colonization created a long-term equilibrium situation marked by sharp political and economic
inequalities, sluggish human capital formation and slow economic growth.

These views have recently come under fire. Coatsworth (2008) contends that the root causes of Latin America’s
backwardness should be sought in the period between 1770 and 1870, when the Latin American economies missed
the opportunity to engage with the industrial revolution and bring about one of their own. In his view, the local elites
did not become stronger in the colonial era but only later, towards the end of the nineteenth century, and – contrary
to what the neo-institutionalists contend – that reinforcement would not have been possible had it not been for
economic growth. Viewed from this standpoint, the concentration of economic power was not an adverse factor but
instead one that fostered development.

Unlike the advocates of earlier traditions, the neo-institutionalists looked to local conditions as the sole
explanation for the region’s development path and inequalities, while turning away almost entirely from an analysis
of how those inequalities were reproduced at the international level and how they influenced the existence of
inequalities at the national level. Similarly, the emphasis on colonial institutions has diverted attention from research
into how institutions have been altered by their interaction with national and international processes of change, with
the most significant of those processes undoubtedly being the industrial revolution and the ensuing succession of
economic growth impulses, technological change and structural and social transformations (Bértola 2011).

The period of state-led industrialization had differing results in terms of equity in different countries. In those
that developed some form of welfare-state, this was a time of declining inequality. This is the case of countries such
as Argentina, Chile and Uruguay. In other countries with very large domestic markets and highly segmented labour
markets in which a large percentage of the population was made up of the descendants of slaves or of mestizo

campesinos (i.e., peasants of mixed American-Indian-European ethnicity) or indigenous groups, the industrialization
process heightened the concentration of wealth and, even among wage-earners, led to a growing polarization of
income levels. Brazil may be regarded as the epitome of this type of experience. In still others, these kinds of
phenomena were in evidence until the industrialization process was quite far along, but at some point distribution
began to improve, particularly as the surplus of rural labour began to shrink and the effects of the development of
the education system began to be felt. Mexico, Venezuela and Colombia are some of the main examples of this type
of pattern. In the long run, a significant effect of industrialization and of the urbanization that went along with it, in
conjunction with widely varying types of agrarian reforms, was the erosion and ultimate elimination of long-
standing forms of servitude that had existed in rural areas, in particular.

There is a broad consensus, as well as detailed information, about how the market reforms of the late twentieth
century led to a significant increase in inequality and about the association between this increase and deregulation,
the destruction of state capacity and deindustrialization. In the Southern Cone, the military dictatorships that seized
power played a major role in the early phases of the reform process, which they accompanied with a systematic
repression of the attempts made by the people to organize, with one of the results being a substantial reduction in
real wages. More generally, however, the economic crises that took place had a powerful negative distributional
impact, while the restructuring of production generated a demand bias for skilled labour that also had an adverse
effect on income distribution. In the first decade of the twenty-first century, however, the trend in distribution
improved and inequality declined. The reasons for this are still open to question, but it is clear that at least two types
of policies have had a broad impact: the improvement of the distribution of educational opportunities had a
cumulative effect, and the newly designed system of social assistance succeeded in reaching the poorest sectors of
the population.

Present challenges from a historical perspective
At least four major lessons for the future can be drawn from Latin America’s history. The first has to do with the
region’s achievements in the area of macroeconomic management. Its accomplishments in terms of inflation and
fiscal sustainability need to be consolidated, but policymakers are also faced with the immense challenge of
managing the Latin American economies’ long-standing vulnerability to external shocks. The response to the 2008–
09 global crisis was in many ways a positive one for Latin America: there was neither an external nor a domestic
financial crisis in any country, and inflation did not spiral out of control. Although it proved impossible to avoid a
sharp initial recession in the region, this was, fortunately, turned around quite rapidly, with the region (and
especially South America) registering a positive growth rate in 2010 and 2011. Furthermore, the boom that preceded
the most recent global crisis and the return of capital flows and high commodity prices since mid-2009 have shown
that there is still a great deal to be learned about handling economic booms and, in particular, about averting cyclical
currency appreciations (which make even less sense in today’s export-oriented economies), upswings in public-
sector spending during times of abundance and, especially, the steep increases in lending and private-sector
spending that typically occur during such periods.

The second lesson relates to economic growth, which has been a frustrating issue for a majority of Latin
American countries during the market reform phase of the 1980s. History tells us that high growth rates cannot be
attained solely on the back of a sound macroeconomic situation or patterns of specialization based on static
comparative advantages. Proactive production policies – which were explicitly excluded from public-sector agendas
during the market reform phase – are also needed. And there is an even more glaring need to fast-forward the design
of proactive technology policies, which were also seriously neglected during the period of state-led industrialization.
This effort should be coupled with a consolidation of the progress made in education and the introduction of
measures to address the education system’s failings, especially in terms of quality and of the alignment of curricula
with the skills and capacities required in order to change the region’s production patterns.

The third lesson refers to institution-building and particularly one dimension of that process which has long
been a subject of controversy: the relationship between the state and the market. A related facet of the Latin
American development process has been the region’s tendency toward rentism, which has been manifested both as a
dependence on the rents afforded by natural resource endowments and as a reliance on those to be derived from a
‘special relationship’ with the state. Education and the development of technology (the two policy areas on which
we focused in the preceding paragraph) are the best way to overcome this Latin American institutional trait.
International experience tells us that an appropriate mix of the state and the market is vital, but it also shows us that
there is no single design that is best for achieving positive synergies between the two.

Contrary to what many have thought in recent decades, the greatest weaknesses in this area may be in the
development of the state’s capabilities. This question was also of importance in the early years of the Latin
American republics. The greatest strides in this regard were made during the phase of state-led industrialization,
even though the state that was created at that time often fell victim to its own inefficiencies and its inability to stand
up to powerful interest groups. Latin America clearly fell further behind not only the industrialized nations but also
the Asian countries (where the development of the state has deep historical roots). History shows us that forward
progress is perfectly feasible, however. When strong policy initiatives are taken, they make important inroads.

Examples include the creation of social-service delivery mechanisms and the development of the production sector
during the period of state-led industrialization, or the actions of the region’s finance ministries and the development
of social assistance programmes during the market reform phase, or the steps taken to build strong central banks
during both periods. Education and technological development should therefore be at the centre of state reform
efforts in the future.

The last and most important lesson has to do with the enormous social debt that Latin America has built up
over its history. The colonial legacy of extreme economic and social inequality, which has been analysed in classic
works of Latin American economic historiography, has been perpetuated and, in some cases, heightened in
subsequent periods of the region’s history, which have added new dimensions to this phenomenon. In the past few
decades, more ground has been lost in this respect, and an entire quarter of a century was lost in terms of poverty
reduction before advances again began to be made in 2002–08. What is more, the contrast between these results and
the advances made in human development indicate that social policy is not enough, in itself, to make headway in
terms of social equity – not as long as the economic system continues to produce and reproduce high level of
inequality in income distribution.

Herein lies Latin America’s greatest historical debt. The return to an equity agenda, the new discourse around
‘social cohesion’ and the forward movement in this area observed during the first decade of the twenty-first century
are all promising signs. The future will show whether or not these trends herald the first steps towards correcting the
most grievous aberration of the Latin American development process. As history has shown us, however, these
advances will not be lasting ones unless they are combined with the changes in education, technology and
production that are needed in order for the region to be able to integrate itself into the global economy in a more
dynamic manner, while at the same time deepening the integration of its own economies and societies.

At the beginning of this chapter Latin America’s position was described relative to western European and northern
American economies. Afterwards a typology of Latin American countries was developed by the analysis of three
distinctive periods, among them the state-building period, the export-led growth period and the later state-led
industrialization period until the economies finally turned back to the market. With these insights in mind, a
subsequent analysis of volatilities of commodity prices, trade balance issues, education and inequality aimed at
explaining the income gap between Latin American countries and higher developed countries in western Europe or
North America. In sum, Latin America was on the one hand falling farther behind the Western countries over the
past two centuries. This can be explained by Latin America’s high concentration on primary commodities as well as
the state of the educational system and institutional structure, some of which are still closely related to its colonial
past, others to recent political developments. Consequently, further improvements in technological and industrial
policies need to be achieved to successfully integrate Latin America’s economies and societies into the global
markets and to converge to the richest world regions.


1. This chapter heavily relies on Bértola and Ocampo (2012).

2. We exclude ‘the larger West’, which as well as what we call ‘the West’ (the leaders of the industrialization
process, made up of the major European powers and the ‘Western offshoots’) also includes other Western
European economies and Japan, which joined the ranks of the leaders later on.

3. In contrast, in life expectancies Latin America fared somewhat better, especially in the twentieth century. The
reduction in mortality rates that raised life expectancy stemmed from four main processes: the improvement of
public health systems, advances in medical theory and practice, improved personal hygiene and higher income
levels and living standards. In Latin America, the mean life expectancy in twelve countries for which information
was available jumped from 29 to 71 years during the twentieth century.

4. Additional criteria that we discuss in Bértola and Ocampo (2012) could be: (1) the type of colonial power; (2)
the type of market into which each society is most fully integrated (export economies, economies that are
subsidiary to export economies, national markets and border or marginal zones); and (3) size, another important
variable which influences the possible scales of production and the available opportunities for diversifying

5. This covers the entire range, from products in which some of the countries of the region have monopolies or
oligopolies (usually for a limited period of time), such as nitrates, coffee or rubber, to those commodities (mainly
tropical or subtropical agricultural goods) in which Latin American countries compete with regions with
abundant, relatively inexpensive labour (Asia and Africa), to agricultural products in which the region competes
with developed countries that are less rich in natural resources and have higher wage levels (wheat, maize, meat,
wool), see Lewis (1969, 1983); Bértola and Williamson (2006).

6. The terminology used here is in line with the recent tendency to refer to the worldwide economic expansion of
the late nineteenth century and early twentieth century as the first wave of globalization.

7. Calculated from GDP growth rates (PPP) from World Bank (2014).

8. See, particularly for Latin America, Bacha and Díaz-Alejandro (1982), Marichal (1989), Stallings (1987) and,
for the more specific case of the debt crisis of the 1980s and the years leading up to it, Devlin (1989). For the
global situation, see also the now classic work of Charles Kindleberger (a recent edition can be found in
Kindleberger and Aliber 2005) and the more recent analysis of Reinhart and Rogoff (2009), which is the source of
the data used to construct Figure 4.2.

9. From the 1960s on, the figure does not include Cuba and thus covers eighteen, rather than nineteen, countries.

10. These are the different dimensions covered in the analysis of financial crises presented by Reinhart and
Rogoff (2009).

11. In other words, how much did the changes of export relative to import prices fluctuate?

12. The ‘relevant world’ for each Latin American country has been identified on the basis of annual variations in
the GDP of each of the destination countries for its exports, weighted according to the share of total exports that it
represents from year to year.

13. The original Prebisch-Singer thesis argues that over the long run the price for primary commodities declines
in proportion to manufactured goods.

14. The income elasticity of demand is a measure that informs us about how much the consumption of a good
increases (in per cent) if income increases by 1 per cent.

15. This trend was heightened by the agricultural protectionist policies introduced at that time, which are still in
evidence today in the developed world. The situation with respect to mineral products, including fossil fuels, is
different, however. Many mineral products are not renewable and subject to strong supply constraints. These
markets are also subject to strong rigidities, particularly after periods when investment has been low, which have
an impact on prices for what are sometimes quite lengthy periods of time, since the lead-time for investments can
be quite long. This production sector is also more likely to be taken over by monopolies or oligopolies than
(tropical or non-tropical) agriculture.

16. This idea has been expressed by Prebisch, Singer, Seers and others and has been taken up by Thirlwall, who
sees it as simply being one of the determinants of convergence and divergence in income levels. See also Bértola
and Porcile (2006) and Cimoli and Porcile (2011).

17. It is important to remember that the ‘relevant world’ for Latin America in this exercise is not the same as it is
for the West’s per capita GDP as shown in Table 4.1.

Further reading

Bértola, L. and Gerchunoff, P. (eds.) (2011), Instituciones y Desarrollo Económico en Hispanoamérica, Santiago:
CEPAL. This book, only available in Spanish, contains chapters on six different regions of Hispanic America: Río
de la Plata; Bolivia, Chile and Perú; the Great Colombia; Central America; Mexico; and Cuba. It is a good
companion to Bértola and Ocampo (2012).

Bértola, L. and Ocampo, J. A. (2012), The Economic Development of Latin America since Independence, Oxford
University Press. A recent, concise and up-to-date comprehensive economic history of Latin America.

Bethell, L. (ed.) (1995), The Cambridge History of Latin America. Latin America since 1930: Economy, Society and
Politics, 6 vols, Cambridge University Press. This sample is not an economic history collection, but a history
collection. Nevertheless, economic history topics are very well covered. The collection covers all the periods and all
the regions of Latin America and many different aspects of Latin American history.

Bulmer-Thomas, V. (2012), The Economic History of Latin America since Independence, 2nd edn, Cambridge
University Press. Originally written in 1994, this book has become a classic of Latin American economic history.

Bulmer-Thomas, V., Coatsworth, J. H. and Cortés Conde, R. (eds.) (2006), The Cambridge Economic History of
Latin America, 2 vols, Cambridge University Press. This is a sample of articles covering many different aspects of
Latin American Economic History, written by a large number of specialists.

Cardoso, C. F. S. and Pérez Brignoli, H. (1979), Historia Económica de América Latina, vols. 1 and 2, Barcelona:
Crítica. Only available in Spanish, this book is an outstanding comprehensive analysis of Latin American economic
history. It represents the state of the art by the late 1970s and its approach is clearly superior to much of the later

Thorp, R. (1998), Progress, Poverty and Exclusion: an Economic History of Latin America in the 20th Century,
Baltimore: Johns Hopkins University Press; Inter-American Development Bank. This is a volume written for a large
audience. It is based on the contributions of a large number of scholars, published in three books with the title An
Economic History of Twentieth-Century Latin America, Houndmills: Palgrave.


Bacha, E. and Díaz-Alejandro, C. F. (1982), ‘International Financial Intermediation: a Long and Tropical View’,
Essays in International Finance, 147. Reprinted in Andrés Velasco (ed.) (1988), Trade, Development and the World
Economy: Selected Essays of Carlos Díaz-Alejandro, Oxford: Basil Blackwell, ch. 8.

Baten, J. and Blum, M. (2014), ‘Why are you Tall while Others are Short? Agricultural Production and Other
Proximate Determinants of Global Heights’, European Review of Economic History 18 (2), 144–65.

Bértola, L. (2011), ‘Institutions and the Historical Roots of Latin American Divergence’, in J. A. Ocampo and J. Ros
(eds.), The Oxford Handbook of Latin American Economics, Oxford University Press, ch. 2.

Bértola, L., Hernández, M. and Siniscalchi, S. (2010), Un índice histórico de desarrollo humano de América Latina
y algunos países de otras regiones: metodología, fuentes y bases de datos, Montevideo: Facultad de Ciencias
Sociales (Serie Documento de Trabajo).

Bértola, L. and Ocampo, J. A. (2012), The Economic Development of Latin America since Independence, Oxford
University Press.

Bértola, L. and Porcile, G. (2006), ‘Convergence, Trade and Industrial Policy: Argentina, Brazil and Uruguay in the
International Economy, 1900–1980’, Revista de Historia Económica-Journal of Iberian and Latin American
Economic History, 1, 37–67.

Bértola, L. and Williamson, J. G. (2006), ‘Globalization in Latin America before 1940’, in V. Bulmer-Thomas, J. H.
Coatsworth and R. Cortés Conde (eds.), The Cambridge Economic History of Latin America, vol. 2, Cambridge
University Press, 11–56.

Cardoso, C. F. S. and Pérez Brignoli, H. (1979), Historia Económica de América Latina, vols. 1 and 2, Barcelona:

Cardoso, F. E. and Faletto, E. (1971), Dependencia y desarrollo en América Latina, México, D.F.: Siglo XXI.

Cimoli, M. and Porcile, G. (2011), ‘Learning, Technological Capabilities and Structural Dynamics’, in J. A.
Ocampo and J. Ros (eds.), The Oxford Handbook of Latin American Economics, Oxford University Press, 546–67.

Contreras, C. (2004), El Aprendizaje del Capitalismo: Estudios de historia económica y social del Perú
Republicano, Lima: Instituto de Estudios Peruanos.

Contreras, C. and Cueto, M. (2004), Historia del Perú Contemporáneo, Lima: Instituto de Estudios Peruanos.

Devlin, R. (1989), Debt and Crisis in Latin America: the Supply Side of the Story, Princeton University Press.

Frankema, E. (2009), Has Latin America Always Been Unequal? A Comparative Study of Asset and Income
Inequality in the Long Twentieth Century, Leiden; Boston: Brill.

Furtado, C. (1976), Economic Development of Latin America: a Survey from Colonial Times to the Cuban
Revolution, 2nd edn., Cambridge University Press.

Gelman, J. (2011), ‘Dimensión económica de la independencia’, in Las Indepedencias latinoamericanas y el
persistente sueño de la Gran Patria Nuestra, México D.F.: Servicio de Relaciones Exteriores de la Cancillería

Gootenberg, P. (1989), Between Silver and Guano: Commercial Policy and the State in Postindependence Peru,
Princeton University Press.

Hausmann, R., Hwang, J. and Rodrik, D. (2007), ‘What You Export Matters’, Journal of Economic Growth 12 (1).

Kalmanovitz, S. and López Rivera, E. (2009), Las Cuentas Nacionales de Colombia en el Siglo XIX. Bogotá,
Universidad de Bogotá Jorge Tadeo Lozano.

Kaminsky, G. L., Reinhart, C. M. and Végh, C. A. (2004), ‘When it Rains, it Pours: Procyclical Capital Flows and
Macroeconomic Policies’, NBER Macroeconomics Annual 19, 11–53.

Kindleberger, C. P. and Aliber, R. (2005), Manias, Panics, and Crashes: a History of Financial Crises, 5th edn.,
New Jersey: John Wiley and Sons.

Leff, N. H. (1982), Underdevelopment and Development in Brazil, vol. I: Economic Structure and Change, 1822–
1947, London: George Allen and Unwin.

Leff, N. H. (1997), ‘Economic Development in Brazil, 1822–1913’, in S. Haber (ed.), How Latin America Fell
Behind, Palo Alto, CA: Stanford University Press, 34–64.

Lewis, W. A. (1969), Aspects of Tropical Trade, 1883–1965, Stockholm: Almqvist and Wicksell (Serie Wicksell

Lewis, W. A. (1983), Crecimiento y fluctuaciones 1870–1913, México D.F.: Fondo de Cultura Económica.

Lindert, P. (2010), ‘The Unequal Lag in Latin American Schooling since 1900: Follow the Money’, Revista de
Historia Económica/Journal of Iberian and Latin American Economic History 28 (2), 375–405.

Marichal, C. (1989), A Century of Debt Crisis in Latin America: from Independence to the Great Depression, 1820–
1930, Princeton University Press.

Mitchell, B. R. (2003), International Historical Statistics: the Americas, 1750–1993, New York: Stockton Press.

Ocampo, J. A. (1984), Colombia y la economía mundial, 1830–1910, Bogotá: Siglo XXI; FEDESARROLLO.

Ocampo, J. A. (1990), Comerciantes, artesanos y política económica en Colombia, 1830–1880, Boletín Cultural y
Bibliográfico, 22, Bogotá: Banco de la República.

Ocampo, J. A. (2008), ‘A Broad View of Macroeconomic Stability’, in N. Serra and J. E. Stiglitz (eds.), The
Washington Consensus Reconsidered, Oxford University Press, 63–94.

Ocampo, J. A. and Parra, M. A. (2010), ‘The Terms of Trade for Commodities since the Mid-Nineteenth Century’,
Revista de Historia Económica – Journal of Iberian and Latin American Economic History 28 (1), 11–37.

Ocampo, J. A., Rada, C. and Taylor, L. (2009), Growth and Policy in Developing Countries: a Structuralist
Approach, New York: Columbia University Press, ch. 1.

Ocampo, J. A. and Vos, R. (2008), Uneven Economic Development, London: Zed Books; United Nations.

Reimers, F. (2006), ‘Education and Social Progress’, in V. Bulmer-Thomas, J. H. Coatsworth and R. Cortés Conde
(eds.), The Cambridge Economic History of Latin America, vol. 2, Cambridge University Press, 427–82.

Reinhart, C. and Rogoff, K. (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University
Press, 2009.

Sánchez Santiró, E. (2009a), Las alcabalas mexicanas (1821–1857): los dilemas de la construcción de la hacienda
nacional, México D.F.: Instituto Mora.

Sánchez Santiró, E. (2009b), ‘El desempeño de la economía mexicana tras la independencia, 1821–1870: nuevas
evidencias e interpretaciones,’ in E. Llopis and C. Marichal (eds), Latinoamérica y España, 1800–1850: Un
crecimiento económico nada excepcional, Madrid and México, D.F.: Marcial Pons, Ediciones de Historia; Instituto
Mora, 65–110.

Stallings, B. (1987), Banker to the Third World. US Portfolio Investment in Latin America, 1900–1986, California
University Press.

Sunkel, O. and Paz, P. (1970), Subdesarrollo latinoamericano y la teoría del desarrollo, 9th edn., México D.F.:
Siglo XXI.

Triffin, R. (1968), Our International Monetary System: Yesterday, Today and Tomorrow, New York: Random


Was there a ‘curse of natural resources’?

Joerg Baten

Latin America and Africa were the world regions which economic observers after the Second World War expected
to be growing quickly because they had many natural resources. In contrast, East Asia was expected to remain poor
because of its poor resource endowment. These expectations were quite wrong. When societies simply sell their
natural resources abroad in exchange for large transfers of money, it is surprisingly difficult to turn this income into
continuous economic development. The availability of oil, diamonds, gold and other natural resources often resulted
in specific types of political economies, in which small groups obtain great wealth to the disadvantage of the
majority of the population and the income and political participation of the majority remains dramatically low. If
revenues are large and sudden, it can be a mixed blessing.

The hypothesis of the ‘curse of natural resources’ suggests that countries that are overly abundant in natural
resources are on average rather unsuccessful in terms of growth (Sachs and Warner 1995, Auty 1993), as it was the
case in Nigeria during the second half of the twentieth century, or Venezuela during the early twenty-first century.
Since being resource-abundant had been regarded as a positive factor of growth, the empirical evidence for the
hypothesis came as a surprise in the 1990s. A number of explanations have been developed for this result. Sachs and
Warner observed that the production of industrial goods is often unprofitable in resource-abundant countries due to
disadvantageous currency exchange rates. Most industrial goods are thus imported. Oil and other resources also
resulted in higher inequality and a large part of the population considers their share of income and political
participation to be insufficient (van der Ploeg 2011). This in turn can lead to political instability, high public deficit
and a dictatorial government system, as well as underinvestment in education (Gylfason and Zoega 2006).

Finally, resource abundance at home or in a neighbouring country can lead to a ‘military bias’. Collier (2007)
has recently pointed to the influence of oil and other mineral resources in the genesis of civil wars. On the other
hand, Brunnschweiler and Bulte (2008) have pointed out that military conflicts can lead to more resource extraction,
hence the direction of causality is not obvious. Observations show that resource-abundant countries and their
neighbouring states have relatively high military spending and that the military is regarded as the most attractive
field for the elites. Conquering resources in military conflicts is perceived as the easiest way to gain wealth and
reputation in resource-abundant economies. However, this means that talented and innovative entrepreneurs are
missing in other industries and services and that the actual basis of development in a country is eroding, in particular
as the subject of further conquests is increasingly unattainable.

Do we observe effects of a ‘curse of natural resources’ in the long-run development as well? Pamuk and
Williamson (2010) argued that a variant of the curse of resources accounts for the slow development of the Middle

East (and in other world regions, similar phenomena might have occurred). As late as 1800, the Ottoman Empire

that constituted the core region of the Middle East was completely self-sufficient in textile production (Pamuk and
Williamson 2010). But in 1910 its textile production had fallen to less than 20 per cent. Why did this strong
deindustrialization occur? British textile imports outperformed many local producers. At the same time, the terms of
trade of cash crops were improving strongly. Raw cotton prices increased substantially, for example. This change in
terms of trade tempted the Middle East to specialize in this area of primary production. Cotton and other commodity
exports were the resource that became a ‘curse’ as the Middle East deindustrialized. This development was later
reinforced by oil exports.

Another important case was the Spanish Empire that obtained enormous wealth in Peru, Bolivia and Mexico in
the sixteenth century. Spain was wealthier than England in the fifteenth century. Its resource-rich South American
colonies provided large cash inflows from silver, but at the same time reduced incentives for industrial development
in Spain. Spanish entrepreneurship seems to be reduced by natural resource abundance, as profits could be made by
resource extraction involving less risk and effort. Innovation and investment in education were therefore neglected,
so that the prerequisites for successful future development were given up. Thus, Spain soon lost its economic
strength in comparison to other countries, such as the Netherlands or Britain.

However, the interaction of rich resources and fairly growth-promoting institutions seems to be rather a
blessing in some countries and periods. For example Norway and Botswana were resource-abundant and developed
well during the later twentieth century because a good institutional framework allowed them to reinvest resource-
income to generate stable future income.

At the same time there are a few more examples of historical economies benefiting from resource abundance.
For example, according to Allen (2009), coal reserves fuelled the Industrial Revolution in the UK as technical
innovations, such as steam engines, were more economical to use than elsewhere. Allen argued that exceptionally
high wages in Britain alongside cheap coal played a decisive role in the Industrial Revolution by inciting an early
adoption of technological innovations. Between 1560 and 1800, there was a sixty-six-fold increase in coal
production. In the UK coalfields were available and could be exploited. Belgium, Germany and China only
developed similar coal mining techniques much later. The price of coal in London was not exceptionally low
compared to other areas of the world, but the coal price in the western areas and in the north-east of Britain was the
lowest observed for the pre-1800 period (Figure I4.1).1

Figure I4.1 Energy prices in different locations, 1750/1800 (gram silver per million British thermal units [BTU])

Source: Allen 2009.

In sum, it seems that large transfers of natural resource income are quite difficult to digest for countries with
imperfect institutions. Only countries with very good institutions or human capital, such as the UK in the early
modern period or modern Botswana and Norway, made good use of income from natural resources. There is much
scope for additional historical studies on these issues because the economic historiography of resource-abundant
countries is so far constrained to very few examples.


1. Kelly et al. (2014) argued that, while the relative cost of energy might in fact be important, there are some
doubts about its exogeneity. In some regions of England, such as in Cornwall, coal was really expensive. In this
region the high cost of coal influenced technological progress to move into another direction. In Cornwall, the
high cost of coal stimulated coal-saving technology such as the one developed by the Cornish engineer Arthur
Woolf (Nuvolari and Verspagen 2009). This suggests, in the view of Kelly et al., that there were deeper forces
that influenced both high wages and the development of low-cost coal as well as technological progress in
England in general. They argued that human capital was a central force that stimulated the British Industrial
Revolution and made the adoption of new technologies based on coal possible, instead of falling into a ‘curse of
natural resources’. Given the high skills of British craftsmen and mechanics and the high health human capital in
the UK, this country avoided the trap of natural resources and became the first industrial nation.


Allen, R. C. (2009), The British Industrial Revolution in Global Perspective, Cambridge University Press.

Auty, R. M. (1993), Sustaining Development in Mineral Economies: the Resource Curse Thesis, Routledge, London.

Brunnschweiler, C. and Bulte, E. (2008), ‘The Resource Curse Revisited and Revised: a Tale of Paradoxes and Red
Herrings’, Journal of Environmental Economics and Management 55, 248–64.

Collier, P. (2007), The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It,
Oxford University Press.

Gylfason, T. and Zoega, G. (2006), ‘Natural Resources and Economic Growth: the Role of Investment’, The World
Economy, Wiley Blackwell 29 (8), 1091–115, p. 8.

Kelly, M., Mokyr, J. and Ó Gráda, C. (2014), ‘Precocious Albion: a New Interpretation of the British Industrial
Revolution’, Annual Reviews of Economics 6, 363–89.

Nuvolari, A. and Verspagen, B. (2009), ‘Technical Choice, Innovation, and British Steam Engineering, 1800–50 –
Super-1’, Economic History Review 62 (3), 685–710.

Pamuk, S. and Williamson, J. G. (2010), ‘Ottoman De-industrialization, 1800–1913: Assessing the Magnitude,
Impact, and Response’, The Economic History Review, 64 (S1), 159–84.

Sachs, J. D. and Warner, A. (1995), ‘Economic Reform and the Process of Global Integration’, Brookings Papers on
Economic Activity 1, 1–118.

Van der Ploeg, F. (2011), ‘Natural Resources: Curse or Blessing?’, Journal of Economic Literature 49 (2), 366–420.


Latin America 1500–1800: early contact,
epidemics and numeracy development

Joerg Baten

One of the most dramatic moments of world economic history was the encounter at Cajamarca: the Inca Emperor
and his large army met a small group of Spanish soldiers and the latter won in the military conflict and conquered
the vast Inca Empire. Diamond (1997) has written a widely read book in which he explained the superiority of the
Spanish as a result of ‘guns, germs and steel’: the modern armament, horses and the shock effects of sixteenth-
century artillery helped the Spaniards. Even more decisively, though, in the overall conflicts between Europeans and
the indigenous people were the germs. The Europeans brought with them a number of diseases such as measles and
smallpox from which many American Indians died because they lacked antibodies. In contrast, Europeans had a
richer endowment of antibodies due to their frequent contact with cattle, sheep and goats from which many of these
diseases originally stemmed. Diamond’s conclusions about the long-run effects of this encounter between American
Indians, Europeans and their diseases are contested (see Acemoglu and Robinson (2012) among many others). But
the importance of the demographic catastrophe caused by imported diseases is obviously a fact. Even lower-bound
estimates arrived at a population decline of around 20–50 per cent (McCaa 2000) and high estimates speak of even
90 per cent. This demographic catastrophe had some surprising effects, similar to the fourteenth century pest
epidemic in Europe, after which real wages in Europe increased. There was a reaction of wages in Mexico, for
example. Arroyo Abad and van Zanden argued that real wages increased substantially after the population
catastrophe. While a family could not be nourished even with basic subsistence by one wage earner alone in the
sixteenth century, by around 1700 the real wage had tripled. In the Andes, real wages were lower and more stagnant,
but even there, wage labour became more important than forced labour (Arroyo Abad, Davies and van Zanden

Another measure of early modern development is numeracy (Figure H4.1). Initially, numeracy of Indios living
in the Inca Empire was substantially lower than Spanish numeracy. After contact, Indios in Lima initially developed
substantial numerical human capital quite rapidly. However, the seventeenth century was a crisis period for
numeracy development, before the eighteenth century brought positive development again. Argentina, originally a
sparsely populated backwater of the Spanish Empire, developed even more rapidly and overtook Peru and Mexico.
In fact, eighteenth century Latin America had a remarkably strong development of numerical skills (Manzel et al.
2012). Manzel et al. (2012) argued that Latin American numeracy development grew as quickly as east-central
Europe, but the lack of freedom under the Spanish and other colonial rule led to the independence wars during the

early nineteenth century, and many Latin American countries suffered from civil war and political instability. Thus

in this period numeracy development decreased.

Figure H4.1 Development of numeracy in Latin American countries

In sum, Latin America’s history during 1500 to 1800 period was not only characterized by colonial exploitation
and inequality (although this was the predominant element), but also long phases of progress and promising


Acemoglu, D. and Robinson, J. (2012), Why Nations Fail: the Origins of Power, Prosperity and Poverty, 1st edn.,
New York: Crown.

Arroyo Abad, L., Davies, E., van Zanden, J. L. (2012), ‘Between Conquest and Independence: Real Wages and
Demographic Change in Spanish America, 1530–1820’, Explorations in Economic History 49, 149–66.

Diamond, J. (1997), Guns, Germs and Steel: the Fates of Human Societies, New York: Norton.

Manzel, K., Baten, J. and Stolz, Y. (2012), ‘Convergence and Divergence of Numeracy: the Development of Age
Heaping in Latin America, 17th to 20th Century’, Economic History Review 65 (3), 932–60.

McCaa, R. (2000), ‘The Peopling of Mexico from Origins to Revolution’, in M. Haines and R. Steckel (eds.), The
Population History of North America, Cambridge University Press.


The economic consequences of independence in
Latin America

Salomón Kalmanovitz

The actual evil that ruled the Spanish and Portuguese colonies was the political system of absolutism. This
monarchical system imposes few constitutional restrictions to the ruler. It is based on corporations that gave raise to
strong social hierarchies and economic inequalities. The Catholic church was the ideological backbone of the
monarchy by constituting this system with a seemingly divine origin of power.

The most recent Latin American economic history literature on the effects of colonialism can be divided into
two broad streams: one that would establish a sort of ‘black legend’ of the Spanish legacy and another which
represents a modern defence for a less negative role of Spain in the development of its colonies.

The former considers Spanish colonial legacy as the source of social and economic inequalities in the economic
development of the respective regions. The main representatives of this opinion are Douglass North, Engerman and
Sokoloff, and Acemoglu and Robinson. In contrast to this neo-institutional trend, Leandro Prados, Rafael Dobado
and others proposed a kind of ‘rosy legend’ by using neo-classical economic methods to demonstrate that economic
growth in the Spanish colonies was quite remarkable during most of the eighteenth century and that independence
triggered a sudden stop to this trend. They developed a counter hypothesis stating that without independence the
continent would have experienced a long-run trend of positive growth (that was only continued after 1860 when
economic growth accelerated). Furthermore, these studies argue that Latin America fares badly when compared with
North America, but is better off if compared with other colonies in Africa or Asia. In the Latin American literature
critical postures of both orientations can be found: some minimize the role of institutions in economic development
by postulating that the latter produces good institutions and not vice versa, like the Argentinean Jorge Gelman. This
hypothesis might be plausible since prosperity strengthens economic interests that need in turn political peace. This
leads to the tendency to negotiate with all groups in order to enhance democratic reforms. However, once these
incentives have vanished, Latin America experienced a frequent resurgence of instability, reflecting the quality of its
political institutions. Other scholars question the idea that Latin America achieved a sort of ‘consolation prize’,
when compared with African economic development, like Prados does. They claim that both continents are
remarkably different and cannot be easily compared.

These issues can be tackled by posing some fundamental questions: what was in particular the Spanish legacy?
What was its role in the framing of a structure of social inequality, modest economic development and
authoritarianism? It was obvious that the Spanish incentive structure limited the extent of trade and private
businesses, that its social base denied property rights to peasants and gave limited communal property rights to

Indian communities. Its legal system defined different rights for Indians, mestizos, slaves and white Creoles. The

most frequent social relations consisted of bondages between peasants and labourers and slavery in plantations and
some mining districts. Besides these facts, the Iberian Peninsula taxed a large part of the meager economic surplus
of its colonies, and impeded the emergence of a commercial bourgeoisie. After independence, the bourgeoisie as
such had to compromise with landowners who held in fact the power in the provinces. As a result of this
development, nowadays, a big mass of poor landless peasants exists (which has now mostly migrated to the cities).

Having these aspects in mind, a new set of questions arises: until when does the colonial legacy exert its
influence? Does the postcolonial course follow a predetermined path set by the colonial institutions, the so-called
path of dependency defined by North? It is obvious that the determinants of long-run development are just too
different and cannot therefore be reduced only to the past. There are additional demographic and geographic factors,
especially immigration, that influence growth. The changes in political and legal organizations, the way in which the
new independent nations removed past institutions and the way of building new ones are only few of them. These
new republics would follow new trajectories, without being free of certain informal institutions of the past, like
religion. They had to go through difficult transitions to arrive at imperfect democratic political systems and to
establish economies free of old ties in their labour and land markets. They could modernize their banking sectors,
after abolishing the Catholic church monopoly of credit. I take recourse to the old Marxist idea, retaken by
Barrington Moore, that the democratic revolution and agrarian reform would facilitate a deeper economic
development, for example in Costa Rica or southern Brazil, and deep political reforms that set conditions for a
strong economic development early in Chile, Costa Rica and later in Mexico.



Osamu Saito

Many, if not all, Eurasian countries from the late medieval to early modern periods saw their population growing,
output expanding and commerce flourishing, despite the notable differences in the ways in which territorial and
administrative consolidation proceeded. Japan was no exception: by the seventeenth century the country became
densely populated, and the subsequent centuries saw land productivity increasing, and industry and commerce
expanding. This chapter begins with an exploration of the population issue: how population growth became
sustained. Then, the core sections trace changes in population, urbanization, output growth by sector and per capita
gross domestic product (GDP) in the period from 1600 to 1874. Japan’s early modern performance will be compared
with other Eurasian countries and the ways in which growth was achieved will be discussed. The final section
touches on Japan’s growth process since the Meiji Restoration of 1868 and the subsequent periods up to 2010.

Population and trade developments before 1600
Located at the eastern end of Eurasia, Japan is an island country, located less than 200 km off the Korean peninsula
but 800 km from the coast of China, the civilized pool of both knowledge and parasites in East Asia. This
geographical position had a demographic implication. The physical distance ‘tended to insulate the archipelago from
disease contacts with the world beyond. This was, however, a mixed blessing, for insulation allowed relatively dense
populations to develop which were then vulnerable to unusually severe epidemic seizure when some new infection
did succeed in leaping across the water barrier and penetrating the Japanese islands’ (McNeill 1979: 133). This is
what actually happened, says McNeill. The Japanese archipelago remained sparsely populated long after the first
contact with mainland China, which ‘meant that a number of important and lethal diseases that became chronic in
China could not establish themselves lastingly among the Japanese until about the thirteenth century’ (McNeill
1979: 133–34). This dating may be debatable. There is a possibility that the critical threshold was passed much later
than he assumed. But he was probably right in arguing that: ‘As long as the island populations were not sufficient to
enable such formidable killers as smallpox and measles to become endemic childhood diseases, epidemics of these
(and other similar) infections coming approximately a generation apart must have cut repeatedly and heavily into
Japanese population, and held back the economic and cultural development of the islands in drastic fashion’
(McNeill 1979: 135). This mechanism may be called the McNeillian trap, which was not unique to Japan. Indeed,
similar logic applies to other peripheral areas at both ends of Eurasia, as McNeill demonstrates in relation to the
British Isles (McNeill 1979: 135–36). In other words, a real advance in terms of economic development was made
only after the demographic threshold had been crossed. For the Japanese archipelago, as I will argue below, it may
well have taken place in the sixteenth century.

According to traditional interpretations, the real break with the past pattern is said to have come at the turn of
the sixteenth century when a 150-year long period of civil war came to an end: the Tokugawa clan and their allies
won a decisive battle with the opponents and cleared the way to form a new shogunate government in 1603 when
population stood as low as 12 million, according to Akira Hayami.1 However, recent estimates suggest that the
transformation had started in the mid-sixteenth century, and that the population total in 1600 was c. 17 million.2 The
new estimate is consistent with a reconstruction of famine chronology. According to the estimated frequencies of
famine, while the eighth and ninth centuries saw a nationwide or cross-regional famine occurring one in less than
three years, its probability was still high in the late medieval period: it remained one in three to four years between
the fourteenth and the mid-sixteenth century. However, the frequency suddenly declined during that century from
that level to an average of once every seven years – in the midst of a long phase of global cooling (Saito 2015a).

Japan’s medieval period from the end of the twelfth century onwards may be portrayed as a long decline of
Kyoto-based central administration and the corresponding rise of territorially based samurai power. After the
collapse of the Kamakura and Muromachi shogunates, two successive samurai regimes, the late-fifteenth century
saw the country thrown into a prolonged period of political instability and warfare. Kyoto completely lost control
over territorial warlords (daimyo), who started fighting with each other over political and military hegemony. It was
in this warring-states period when the drastic decline in famine frequency took place. Although it is difficult to relate
any increase in the number of battles to the reduction in famines, this finding seems to suggest that although the
frequency of devastating harvest may not have declined noticeably, the probability of the poor harvest resulting in a

mass starvation or excess mortality was actually reduced under warlords’ rule. What the sixteenth-century warlords
brought about is territorial consolidation and administrative integration. An area which came under control of the
warlord saw a rudimentary kind of territorial government being formed for the first time in Japanese history, which
must have acted as an important factor in preventing any poor harvest from developing into a regional or cross-
regional famine, which in turn enabled population to start increasing and, hence, to pass the epidemiological and
demographic threshold eventually.

This also implies that state formation began before the establishment of the Tokugawa regime. The policies and
schemes which many warring daimyo adopted included not just disaster relief but also extensive projects of land
development, especially in lower reaches of the river. It is often argued that the cultivation of farm land extended
towards less fertile, marginal areas. However, it was not the case in Japan, nor in many rice-growing Asian
countries. There the move was towards fertile alluvial plains of the river delta. In earlier centuries, excess water and,
hence, poor sanitation had prevented people from moving into marshy lowland areas. Under the daimyo
government, however, investments were made either in the form of civil engineering projects such as land
reclamation and the building of dykes and reservoirs, or of introducing new rice varieties which could withstand
marshy conditions, or both. It is documented that the very long-run tendency in agricultural progress was associated
with a change in the cause of crop failure from drought to cold summer (Saito 2015a); this is because the former,
which affects the early growth processes of the rice plant, could be overcome by infrastructural investments whereas
the latter could not in earlier centuries. In this respect, the land development projects by sixteenth-century territorial
lords might be singled out to have contributed to the general trend. However, their efforts were so erratic and slow
that it is not possible to account for the onset of the observed decline in famine frequency with this factor alone.
Agrarian progress was a very gradual process.

The sixteenth-century population development coincided with the age of Asia’s flourishing maritime trade.
Portuguese and, later, Dutch merchants played a decisive role while Chinese, Indian and other Asian traders
responded to market opportunities created by an increased volume of intra-Asian trade. In fourteenth-century Japan,
licensed trade with China was arranged by the Muromachi shogunate while Japanese trading brigands (wakō) had
long been active in the China Sea areas. But it was the introduction of a new cupellation technology to Japanese
silver mines in the early sixteenth century that touched off a mining and, hence, export boom (see Map 5.1 on
Japan’s silver export and other trading patterns in East Asia). This enabled Japan’s supply of silver onto the world
market to rival the mines of Spanish Mexico and Peru. In fact, according to official statistics, average annual silver
exports between 1596 and 1623 is said to have amounted to about 10 per cent of the nation’s total farm output; with
smuggling taken into consideration, the silver share could have been even larger (Hayami 2004: 13, Shimbo and
Hasegawa 2004: 167). During this mining boom, the wakō’s seafaring trade expanded with an increasing number of
Chinese, Korean and Portuguese traders involved, whose activities were sometimes backed by Japanese daimyo.
Traders and adventurers crossed the seas: in the early seventeenth century, at least 10,000 Japanese are said to have
settled in Cochin-China, Ayutthaya, Manila and other Asian port cities (Lucassen et al. 2014: 366). Moreover, some
of the daimyo in the Japanese south-west regions sent their own ships to Southeast Asian ports. All this seems to
suggest that from the sixteenth century onwards, population growth, state formation and economic development
went hand in hand, and this cumulative process produced a large population of settled farmers, on the one hand, and
a small but powerful group of merchant adventurers, on the other. By 1600, therefore, having already broken away
from the McNeillian trap, Japan set herself on the path to early modern growth.

Map 5.1 Trade and production centres in East Asia in the late sixteenth century

Source: see map 1.1.

Growth performance in the early modern period
Based on the above account, Figure 5.1 shows how population totals changed from 1525 onwards. One notable
feature of this new graph is that the rate of increase over the seventeenth century was less rapid than Hayami
thought. The estimated annual rate of population increase from 1600 to 1720 stands now at 0.5 per cent, rather than
0.8 per cent.3 This population growth was accompanied by land development and output growth. Over the same
120-year period, arable land area increased by 40 per cent and farm output by 60 per cent (Miyamoto 2004: 38):
clearly, farming became intensified. In per capita terms, however, there occurred no growth. In fact, as the
population increased by 80 per cent, farm output per head of national population declined marginally. However,
Figure 5.1 indicates that the process was also accompanied by urbanization. Soon after the battle of 1600, the first
Tokugawa shogun began constructing new castles and surrounding town facilities by mobilizing manpower and
resources from non-Tokugawa daimyo. The project took several decades to complete, which was followed by the
other daimyo’s own castle town building. This entire building boom created a huge demand for construction workers
and, after completion, attracted a number of merchants and craftsmen to settle in the towns and cities (Lucassen et
al. 2014: 398–403). Thus, the proportion of people living in places with populations of 10,000 or over rose from 6
per cent in 1600 to 12 per cent in 1720, which implies that while rural population grew by 70 per cent, urban
population more than tripled. Whether people’s overall standard of living declined or not hinges on the estimation of
GDP, more specifically on that of output in the secondary and tertiary sectors at both the beginning and the end of
the 120-year period.

Figure 5.1 Population and the rate of urbanization, 1525–1890
Note: the rate of urbanization is calculated for cities with a population of 10,000 or more, and does not cover
Okinawa and Hokkaido, the territories which were not under effective control of the Tokugawa shogunate.

Sources: Saito (2015a), p. 222, for population totals in 1525 and 1600. Other data are from Saito and
Takashima (2015a).

So far two estimates have been made for per capita GDP in the period before the Meiji Restoration of 1868:
Maddison’s 2001 estimates and those in a working paper by Jean-Pascal Bassino et al. (Maddison 2001: 264, and
Bassino et al. 2011; the latter is included in the first report of the Maddison Project: Bolt and van Zanden 2014).
There are a couple of differences between the two. First, Bassino et al. have estimated the level of per capita GDP to
be systematically higher than Maddison’s for the first half of the Tokugawa period but not for the second, which is
at odds with the Tokugawa historiography. It is well known that following the drastic decline in silver mining the
export boom ended rather abruptly in the early seventeenth century; while the domestic economy benefited from the
shogun’s and other daimyo’s town building projects, growth lost momentum towards the end of the century as the
government’s so-called seclusion policy stifled the overseas trade. It is documented that the eighth shogun’s
government made an effort to ‘substitute domestic goods for imports’, targeting raw silk, sugar and ginseng (Totman
1993: 311–14). Although it is difficult to substantiate its policy effects, the production of domestic raw silk did
expand from the 1920s onwards. More generally, the rural economy appeared to grow from the late eighteenth
century onwards – the growth was initially modest and steady but accelerated after the country’s reentry into world
trade in 1859 – which resulted in the unmistakable decline in the urbanization rate as evident in Figure 5.1 (Smith
1973: 15–49; Saito 1983: 30–54, 2005a, 2005b, 2010: 240–61). Second, Maddison’s attempt to include non-primary
sector output is based on a reading of non-quantitative works while Bassino et al. rely solely on the changing rates
of urbanization. Both are thus not quite satisfactory. A new attempt to estimate secondary- and tertiary-sector output
has been made by Masanori Takashima and myself. Our method utilizes not only the rate of urbanization but
population density as well, both derived from Meiji-period prefectural panel data (based on which regression
analysis is conducted for the secondary- and tertiary-sector shares separately; with the estimated parameters, the
sectoral shares are back-projected to the Tokugawa period).4 The point of employing this two-parameter method is
that it allows us to measure the impact of proto-industrialization better.5 As Figure 5.1 makes clear that while both
population totals and the rate of urbanization increased until 1721, the two graphs diverged from the late eighteenth
century to the 1870s, a period when rural industry and commerce advanced at the expense of the urban sector. Our
two-parameter model captures the impact of this trend on both secondary- and tertiary-sector output far better than
any one-parameter method.

The new per capita GDP estimates are presented in Table 5.1 and graphically in Figure 5.2 together with
Maddison’s for comparison (both are in 1990 international dollars). It is interesting to note that the level of both
estimates have come very close to each other in the mid-Tokugawa period, i.e., 1700–21. On both sides of this mid-
point, however, there emerge differences. From 1721 to the 1870s, the gap between the two widens and ours ends 14
per cent higher than Maddison’s level, capturing the effect of proto-industrial progress made during that period. In
the 1600–1721 period, the initial gap was non-negligible but narrowed towards the end of the period. This is because
our estimates of per capita GDP imply that the trend was stagnant or growing marginally over the 120-year period.
To put it differently, while Maddison presented Tokugawa Japan’s growth as a steady path, our estimates suggest
that there was a turning point from the stagnant to the sustained growth phase.

Table 5.1 New estimates of GDP per capita (in 1990 international dollars) and sectoral shares in Japan, 1600–1935

GDP per capita Sectoral share (%)

(dollars) Primary Secondary Tertiary

1600 556 72 8 20

1721 587 61 9 30

1804 729 61 9 29

1846 788 61 10 30

1874 860 59 11 30

1890 1,012 44 16 39

1913 1,387 33 23 44

1925 1,885 27 26 47

1935 2,120 16 35 49


1. GDP per capita for 1600–1874 are from Saito and Takashima (2015b), Fukao et al. (2015), 71, and
Maddison (2006), 178–79 for 1874–1935. The link is made by projecting Maddison’s 1890 estimate in 1990
international dollars back to 1874 with a growth rate calculated from Fukao et al.’s 1874 and 1890 estimates.
Then, it is linked to Saito and Takashima’s 1600–1874 estimates.

2. Sectoral shares are from Saito and Takashima (2015b) for 1600–1874 and Fukao et al. (2015), 71, for 1874–
1935. The 1913 shares are interpolated from the latter’s 1909 and 1925 estimates.

Figure 5.2 GDP per capita, 1600–1874: new estimates compared with Maddison’s (both in 1990 international

Sources: Saito and Takashima (2015b) and Maddison (2001: 264).

Does this finding endorse the claim that the early Tokugawa society was under the Malthusian pressure? The
observed rate of change in GDP per capita was close to zero. Moreover, given the nature of our estimation
methodology, it is likely that the mining and export boom that had started before Tokugawa was not properly
reflected in our output estimate for 1600: as hinted earlier, the proportion of silver export to total primary-sector
output could have been somewhat higher than the 10 per cent mark. If that amount should be added to our estimate
of non-primary products in 1600, then the revised average annual rate of change in GDP per capita between 1600
and 1721 would become negative, –0.01 per cent. Probably, therefore, we have to accept that it was a period of
negative – but still close to zero – growth. It was partially accounted for by moderately high population growth of
0.5 per cent per annum. Additionally, however, the decline was furthered first by the extinction of exportable silver
and then by the end of the construction boom. During this process, men of pecuniary fortunes such as long-distance
traders and large-scale developer-contractors disappeared from the centre stage; and daimyo too must have
squandered away a substantial portion of their wealth on the construction of their castle town. After about 1700,
therefore, the market economy became more or less regular and orderly; and the market functioned generally well –
even compared with other Eurasian countries.6 In other words, all this does not necessarily imply that living
standards worsened for the peasantry who probably made up more than 80 per cent of the population at the
beginning of the seventeenth century. During the first half of the Tokugawa period, as Thomas Smith argued
decades ago (Smith 1959), individual farm families became the centre of production organization and decision-
making in relation to both external as well as market conditions. Within this agrarian framework and under a
peculiar taxation system of the Tokugawa era, the intensification of agriculture paid: any surplus left was in the

hands of the peasants (Smith 1958: 50–70). Moreover, the engagement in non-farm subsidiary employment also
paid: it brought in more cash incomes to the household. It was on this basis that proto-industrialization and
commercialization proceeded in the second half of the Tokugawa period (Smith 1969: 71–102; Nishikawa 1987:

However, this advance of Tokugawa Japan’s labour-intensive mode of agrarian economy should not be taken to
imply that the country began to catch up with the West. Our estimates in Table 5.1 indicate that per capita GDP
reached the level of 860 dollars by 1874, which turns out to be very close to Maddison’s estimate of the world
average for 1870 but stands much lower than the level of 2,064 dollars for the wealthy West (see Figure 5.3). Within
Asia, it is likely that Japan’s per capita GDP surpassed the levels of China and India during the late eighteenth and
early nineteenth centuries.

Figure 5.3 Growth of Japan’s GDP per capita, 1885–2010: comparison with the West and the world (in 1990
international dollars)
Notes: (1) the vertical axis has a logarithmic scale; (2) Maddison’s series for Japan ends in 2008, which is
extended to 2010 by linking with the Annual Reports on National Accounts data. The ‘West’ is a population-
weighted average of western Europe and western offshoots (Australia, New Zealand, Canada and the US).

Sources: Maddison (2001: 241, 264), Maddison (2006: 180–85, 234, 236), and Cabinet Office of the Japanese
Government (2011, 2012).

Early modern growth in Eurasian perspective
According to Bolt and van Zanden’s survey of recent estimates, Japan’s per capita GDP was still very low in 1800 in
comparison with other Eurasian countries including India and Ottoman Turkey (Bolt and van Zanden 2014: 637).
However, if comparison is to be made on terms of growth rate with our new estimates for Tokugawa Japan, then a
somewhat different picture emerges. Table 5.2 sets out the average annual rates of GDP per capita for eight
countries in both Asia and western Europe in the period before 1700 and also after 1700 (China is added from the
Maddison table). In the period before 1700, while England and Holland exhibited comparatively stronger growth,
both south European and Asian countries were characterized by either a decline or a stagnant trend. As noted earlier,
Japan was not an exception. The period after 1700 saw the two north-west European countries growing at an even
higher pace than in the previous period, but fortune was fickle for the countries in the second group. Italy, India and
China were still on the decline, Spain’s growth turned positive, and the Ottoman Empire remained steady. What
stands out, however, is late Tokugawa Japan’s good performance. Not only did it turn positive, but its average
growth rate of 0.24 per cent, on a par with Holland’s but considerably lower than England’s, was well ahead of any
other countries’ in the second group.

Table 5.2 Average annual growth rates of GDP per capita, 1500–1870: Japan in comparison with other Eurasian
countries (per cent per annum)

England Holland Northern Italy Spain Ottoman Empire India China Japan

1500–1700 0.15 0.19 −0.02 −0.02 0.03

1600–1700 −0.08 0.00 0.00*

1700–1800 0.36 0.21 −0.08 0.12 0.05࿿ −0.12 −0.07† 0.24‡

Sources: Table 5.1 for Japan; Maddison (2001: 264) for China; Bolt and van Zanden (2014: 637) for other


* 1600–1720,

࿿ 1700–1820,

† 1700–1870,

‡ 1720–1874.

This finding calls for attention, for during much of the 150-year period the country was virtually closed to
overseas trade and the growth was distinctly pre-modern, i.e., achieved without machinery and the factory. In this
respect, it is interesting to note that Table 5.1 indicates first that the tertiary sector’s share was substantially larger
than the secondary’s throughout the Tokugawa period. Although there remain problems associated with the

classification of goods produced, it appears that those engaged in trading, financing and bringing commodities back
and forth were numerous probably from the very beginning of the period. Moreover, little structural change occurred
despite the steady growth in the period after 1720: the secondary- and tertiary-sector shares did not increase
noticeably. Growth of secondary and tertiary output in the final sub-period, 1846–74, was stronger than that of
primary goods, reflecting the impact of the reentry into international trade, but as far as the period between 1721 and
1846 is concerned, the sectoral shares hardly changed. This means that sectoral output growth was balanced. Rural
industry expanded, especially in textiles, but agriculture, commerce and services also grew more or less
simultaneously. What took place was a separation of the cultivation of industrial crops from food crops, the
manufacturing of intermediate goods from finished goods and the trading for producers from that for consumers. For
example, the rise of silk weaving in any region meant an increase in the demand for raw silk. Under the seclusion
regime, there was no option to import raw materials; thus, this went directly to sericulturists and mulberry
cultivators in surrounding villages, and resulted in an increase of primary-sector output. At the same time, the
marketing of silk fabrics involved more transport and distribution businesses, creating more part-time or by-
employment jobs. All these took place in different districts and, sometimes, in remote regions, thus taking the form
of regional specialization helped by the well-functioning domestic markets. Since such regional specialization is one
form of Adam Smith’s division of labour, this type of economic change may be called Smithian growth. Of course,
Smithian growth was not unique to Japan. What made Tokugawa Japan’s experience rather conspicuous is that it
was accompanied by deurbanization. To borrow Thomas Smith’s terminology, Japan’s Smithian growth was ‘rural-
centered’ as contrasted with ‘urban-centered’ (Smith 1973: 127–160).

It is suggested, furthermore, that this rural-centred development did not bring any gains to both samurai and the
urban wealthy (Smith 1973: 37–41), implying that growth had a levelling effect on income distribution. Elsewhere,
by having examined wage data, I have shown that in contrast with north-western Europe where real wages tended to
decline despite output growth, Tokugawa wage trends did not diverge from per capita GDP growth (Saito 2005a).
Moreover, my recent reconstruction of a social table for the Chōshū region in the 1840s has revealed that interclass
inequality was surprisingly low (Saito 2015b). Of course we have to take within-class income distribution into
account: it was not so egalitarian and in fact much skewed in the case of the samurai case; and now that the growth
rate in per capita GDP in the latter half of the Tokugawa period has been reestimated upward, my first statement
needs to be revised accordingly. That said, however, it is likely that the income level of the majority of peasants was
not particularly lower than that for the median level of urban incomes or even that of lower-rank samurai stipends.
In this respect, it is interesting to note that the overall levels of literacy and numeracy in Tokugawa Japan were high
by early modern standards, distinctly higher than in many other Eurasian countries. In the area of numeracy, Ma
notes in Chapter 6 of this volume that the basic numeracy index – which measures people’s ability to report an exact
rather than a rounded age – in East Asia was at a level comparable to that for north-west European countries, and
moreover, that Japan’s index came close to the 100 per cent mark throughout the nineteenth century (Figure 5.2). As
for literacy, Ronald Dore estimated that the proportion of boys who would ever had received some kind of schooling
was 43 per cent at the end of the Tokugawa period (but 10 per cent for girls). Bold as these estimates may sound, it
seems certain that by about 1800 ‘richer merchants and village headmen were often as learned as the average
samurai, and at a lower level the spread of Japanese literacy continued’, as a result of which in 1877 a Frenchman
wrote that ‘primary education in Japan has reached a level which makes us blush’.7 This advance in human capital

investment in the Tokugawa period must have been an important legacy for the subsequent era of fully fledged

Growth acceleration and deceleration, 1868–2010
When Meiji Japan opened up in the wave of nineteenth-century globalization, the attainment of economic growth by
industrializing the country became the national goal. Since then Japan has been regarded as a success story of
twentieth-century industrialization and, hence, modern economic growth. To check in what sense it was a success,
Japan’s growth records may be examined in relation to those of the West and the world average (Figure 5.3).

From 1890 to 1935, per capita GDP growth was steady – on average at 1.7 per cent per annum (Table 5.1). The
First World War exerted a stimulating rather than depressing effect on the domestic economy, and the impact of the
Great Depression was less prolonged in comparison with the Western countries. In the second half of the 1930s, the
country enjoyed a brief period of strong growth due to military build-up, but the wartime regime soon faced an
economic impasse and then experienced a precipitous decline in people’s standard of living (on the wartime
economy, see Highlight Chapter 5.1). In 1950 per capita GDP returned to the 1935 level. As is evident from Figure
5.3, however, during the 1890–1950 period Japan’s level hardly diverted from the growth path of the world. Japan
was an average country in the world until the mid-twentieth century. Even in interwar East Asia Japan’s growth
performance was not exceptionally superior, either. According to Ma’s estimates of average rates of per capita GDP
growth between 1914–18 and 1931–36 (Table 6.1 in Chapter 6), Japan’s stood at 1.4 per cent while that of the three
China Sea areas, i.e., the Lower Yangzi macro-region, Korea and Taiwan, fell in a range of 1.1–1.5 per cent. It was
in China proper where economic development faltered. Considering this Chinese situation, Japan’s growth
performance over the long run was an achievement, to which human capital formation in the late-Tokugawa and
institution-building efforts in the Meiji period may well have been conducive. Yet, if the average rate for the pre-
1940 period had continued after the Second World War, as Bob Allen noted, ‘it would have taken Japan 327 years to
catch up to the US. That was not fast enough’ (Allen 2011: 126).

The catch-up with the West took place after the world war – in a short period between 1950 and 1973, the year
of the first oil crisis, during which the average rate of growth stood at 8.1 per cent. As Figure 5.3 shows, it is in this
period of strong growth when Japan joined the world’s club of rich countries.

Since the political scientist Chalmers Johnson coined the term ‘developmental state’, an interventionist state
whose raison d’être is the attainment of economic development (Johnson 1982), Japan’s economic success has often
been considered a product of the state’s planning and guidance. The early Meiji government’s industry promotion
and the post-Second World War Ministry of International Trade and Industry (MITI)’s industrial policy are said to
have been particularly effective and exemplary. However, the early Meiji policy models resulted in a total failure,
while many economists emphasize that competitive industries of the 1950s and 1960s grew without any government
guidance (Saito 2014: 23–45; Komiya et al. 1988). Moreover, almost all those that emerged in the 1950s and 1960s
were industries producing consumer durables. In the nineteenth-century West, industries producing intermediate
goods for other producers led the tempo of industrialization; in the early twentieth century, therefore, Japan made an
effort to promote those industries but yielded only a moderate success. After 1950 the tide changed. The emerging
Japanese firms in car making and electronics, targeting an expanding mass consumer market, developed an
innovative model of manufacturing methods which tended to be skill-using but compatible with the American mode
of mass production. Toyota, Sony and Panasonic, to name but a few, were such firms and their growth owed nothing
to MITI’s industrial policy (Fukao and Saito 2013: 146–48).

Finally, however, high economic growth was short-lived. The average rate of growth declined to 3 per cent per
annum in the period from 1973 to 1990 and further to 0.9 per cent in the 1990–2000 period. This phase of
deceleration was accompanied by deindustrialization. Before 1973, the proportion of gross value added of the
manufacturing sector to GDP stood at 35 per cent or over. Immediately after the 1973 oil crisis it declined by 5
percentage points, which went down again after the so-called bubble years. In 2008, the manufacturing sector’s
share in output further declined to below 20 per cent, and in 2010 the tertiary sector’s share in the workforce reached
70 per cent (Fukao and Saito 2013: 152). This process thus meant a transition to a service economy. However, the
post-industrial transition was not occasioned by a rise in productivity in the tertiary sector. According to estimates of
industry-specific total factor productivity (TFP), while an increase in manufacturing TFP is still reasonably steady,
the tertiary sector’s TFP growth has been sluggish since the 1970s. The level of labour productivity in services and
construction remains low by international standards (Fukao and Saito 2013: 155–57).

Since 2008, the country’s population has begun to shrink. A several century-long population growth cycle has now
ended. In the sixteenth century, the country’s population started to increase and thus became for the first time in
history able to sustain itself. The extent of the market was enlarged, which acted as a stimulus for the division of
labour to proceed. Smithian growth thus started in the early eighteenth century when the population is believed to
have crossed the 30 million mark. The take-off took place without any external influences, and growth that followed
was steady and comparatively stronger by early modern Eurasian standards. While this late-Tokugawa development
was sectorally balanced, manufacturing growth was one important component of the process. The transition from the
proto-industrial to the subsequent phase of industrialization was more or less continuous, although industries of the
classical industrial-revolution type that rose in the Meiji period relied more on borrowed technologies and
organizations. The effort of this fully fledged industrialization phase, 1870–1940, had only modest success,
however. It was in the post-Second World War period of 1950–73 when Japan became able to catch up with the
West, owing largely to the innovative adaptation by Japanese manufacturing firms of American technologies of
mass production, which kept – rather than eliminated – skills on the shop floor.

Shortly after this period of very strong manufacturing growth came the sudden onset of deindustrialization. In
the domestic economy, the three-century-long process of industrialization seems to have ended. A rapid shift to a
service economy began – the trend that became even more apparent in the early twenty-first century. As the
population is ageing and fertility remains low, the domestic market is saturated; and as a number of manufacturing
companies have opted for relocating their factories to China, Thailand and other Asian countries, employment has
drifted towards a less productive service sector. Japan’s post-industrial economy now faces challenges totally
different from the difficulties the country encountered 150 years ago.


1. Akira Hayami, the pioneer of Japanese historical demography, has long been arguing that the population in
1600 was substantially lower than 18 million, a guesstimate made a century ago (reprinted in Hayami 2009: 75–
98). Hayami’s estimate of c. 12 million is derived from an extrapolation of regional population trends in one
region between the late seventeenth and the eighteenth century but many scholars have accepted Hayami’s 1600
estimate until recently. It should be realized, however, that this acceptance of the Hayami estimate implies that
given the estimated size of national population being 31 million in 1720, the average annual rate of population
growth was 0.8 per cent during the seventeenth century. This is considered very high by premodern standards, so
high that the early Tokugawa economy must have come under mounting population pressure: according to
Miyamoto’s summary table, farm output per capita is estimated to have decreased as much as 38 per cent from
1600 to 1720. It is odd therefore to suppose, as Hayami does, that such a century saw significant transformations
– such as the development of ‘land and labour-intensive agriculture’ and the emergence of ‘a landed proprietor or
cultivator seeking to increase productivity or production’ – taking place (Hayami 2009: 45). His estimates are
summarized with other macroeconomic indicators in Miyamoto (2004: 38).

2. My unpublished estimate is 17 million. My unpublished estimates of population totals are quoted and discussed
in Farris (2006). Angus Maddison also argued that the level must have been far larger than the Hayami estimate,
saying that the Hayami estimate implied the above-mentioned very high rate of population increase in the
seventeenth century, followed by ‘more or less complete stagnation’ in the eighteenth, a change which he thought
is too abrupt to accept. See Maddison (2001: 237).

3. The graph suggests that this seventeenth-century population increase may be traced back to the early sixteenth
century. However, as the figure for 1525 is a speculation, the trend for the entire 1525–1720 period remains still

4. An earlier version of this chapter was presented as Saito and Takashima (2014). I thank Masanori Takashima
for allowing me to make use of our joint research results for this chapter. Note that estimates quoted in the text are
revised from the May 2014 version.

5. They are derived from Meiji-period regional panel data. On the basis of this prefectural panel dataset,
regression analysis was conducted for the secondary- and tertiary-sector shares separately; then with the
parameters estimated, the sectoral shares were back-projected to the Tokugawa period. For details, see Saito and
Takashima (2015b). Note that this criticism is accepted by the authors of Bassino et al. (2011) and the two-
parameter model adopted in its latest revision of early modern GDP per capita estimates (Bassino et al. 2015).

6. This is what Jan Luiten van Zanden has found for grain markets in China, India, Indonesia and Japan in
comparison with European countries in the North Sea region: see van Zanden (2009). For Tokugawa Japan’s
factor markets, see Saito (2009: 169–96) and Saito and Settsu (2006).

7. For his estimation of literacy rates, see Dore (1965: 317–22, 31, 291). Herbert Passin went further to break
down the national average by social group and gave guesstimates of 50–60 per cent for ‘village middle layers’
and 30–40 per cent for ‘lower peasant levels’ (Passin 1965: 57).

Further reading

Allen, G. C. (2013), A Short Economic History of Modern Japan, London: Allen and Unwin. Still useful, giving an
accessible account of the economic history from the Meiji Restoration to the late 1930s.

Fukao, K. and Saito, O. (2013), ‘Japan’s Alternating Phases of Growth and Future Outlook’, in D. S. Prasada Rao
and B. van Ark (eds.), World Economic Performance: Past, Present and Future, Cheltenham: Edward Elgar, 136–
61. This takes another look at Japan’s modern economic growth from a twenty-first century, post-industrial vantage

Hayami, A., Saito, O. and Toby, R. P. (eds.) (1999), Emergence of Economic Society in Japan 1600–1859, Oxford
University Press. Provides scholarly surveys of issues and evidence in the economic history of the early modern

Nakamura, T. (1994), Lectures on Modern Japanese Economic History: 1926–1994, Tokyo: LTCB International
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international contexts of the day.

Nakamura, T. and Odaka, K. (eds.) (2003), Economic History of Japan 1914–1955: a Dual Structure, Oxford
University Press. A collection of essays by leading Japanese scholars covers the interwar and postwar reconstruction
periods, with special reference to an emerging dual structure of the industrializing economy.

Saito, O. (2014), ‘Was Modern Japan a Developmental State?’, in K. Otsuka and T. Shiraishi (eds.), State Building
and Development, Abingdon, England: Routledge, 23–45. Gives a critical reexamination of the role of the state in
Japan’s economic development, 1859–1938.

Tolliday, S. (ed.) (2001), The Economic Development of Modern Japan, 1868–1945: From the Meiji Restoration to
the Second World War, 2 vols., Cheltenham: Edward Elgar. A four-volume reprint collection of articles and essays
by both Japanese and non-Japanese scholars on various issues covering the entire period of Japan’s economic
transformation from the Meiji Restoration to the post-Second World War bubble economy. Volume 1 of the first
includes some seminal papers on the pre-1868 period.


Allen, R. C. (2011), Global Economic History: a Very Short Introduction, Oxford University Press.

Bassino, J. P., Broadberry, S., Fukao, K., Gupta, B. and Takashima, M. (2011), ‘Japan and the Great Divergence,
730–1870’, London School of Economics Working Paper.

Bassino, J.-P., Broadberry, S., Fukao, K., Gupta, B. and Takashima, M. (2015), ‘Japan and the Great Divergence,
725–1874’, Centre for Economic Policy Research Discussion Paper Series No. 10569,

Bolt, J. and van Zanden, J. L. (2014), ‘The Maddison Project: Collaborative Research on Historical National
Accounts’, Economic History Review 67, 627–51.

Cabinet Office of the Japanese Government (2011), Annual Reports on National Accounts 2009, Tokyo: Ministry of
Finance Printing Bureau.

Cabinet Office of the Japanese Government (2012), Annual Reports on National Accounts 2010, Tokyo: Ministry of
Finance Printing Bureau.

Dore, R. P. (1965), Education in Tokugawa Japan, London: Athlone Press.

Farris, W. W. (2006), Japan’s Medieval Population: Famine, Fertility, and Warfare in a Transformative Age,
University of Hawaii Press.

Fukao, K., Bassino, J.-P., Makino, T., Paprzycki, R., Settsu, T., Takashima, M. and Tokui, J. (2015), Regional
Inequality and Industrial Structure in Japan: 1874–2008, Tokyo: Maruzen.

Hayami, A. (2004), ‘Introduction: the Emergence of Economic Society’, in A. Hayami, O. Saito and R. P. Toby
(eds.), Emergence of Economic Society in Japan 1600–1859, Oxford University Press, pp. 1–36.

Hayami, A. (2009), Population, Family and Society in Pre-modern Japan, Folkestone, UK: Global Oriental.

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Lucassen, L., Saito, O. and Shimada, R. (2014), ‘Cross-cultural Migration in Japan in a Comparative Perspective’, in
Jan Lucassen and Leo Lucassen (eds.), Globalising Migration History: the Eurasian Experience (16th–21st
Centuries), Leiden: Brill, 362–409.

Maddison, A. (2001), The World Economy: a Millennial Perspective, Paris: OECD.

Maddison, A. (2006), The World Economy: Historical Statistics (Paris: OECD).

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Miyamoto, M. (2004), ‘Quantitative Aspects of Tokugawa Economy’, in A. Hayami, O. Saito and R. P. Toby (eds.),
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8, 30–54.

Saito, O. (2005a), ‘Pre-modern Economic Growth Revisited: Japan and the West’, Working Paper of the Global
Economic History Network 16/05.

Saito, O. (2005b), ‘Wages, Inequality, and Pre-industrial Growth in Japan, 1727–1894’, in R. C. Allen, T. Bengtsson
and M. Dribe (eds.), Living Standards in the Past: New Perspectives on Well-being in Asia and Europe, Oxford
University Press, 77–97.

Saito, O. (2009), ‘Land, Labour and Market Forces in Tokugawa Japan’, Continuity and Change 24, 169–96.

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for the Great Divergence’, Australian Economic History Review 50, 240–61.

Saito, O. (2015a), ‘Climate, Famine, and Population in Japanese History: a Long-term Perspective’, in B. L. Baten
and P. C. Brown (eds.), Environment and Society in the Japanese Islands: from Prehistory to the Present, Oregon
State University Press, 213–29.

Saito, O. (2015b), ‘Growth and Inequality in the Great and Little Divergence Debate: a Japanese Perspective’,
Economic History Review 68 (2), 399–419.

Saito, O. and Settsu, T. (2006), ‘Money, Credit and Smithian Growth in Tokugawa Japan’, Hitotsubashi University
Hi-Stat Discussion Paper Series No. 139,

Saito, O. and Takashima, M. (2014), ‘Estimating the Shares of Secondary- and Tertiary-Sector Output in the Age of
Proto-industrialisation: the Case of Japan, 1600–1874’, Conference Paper ‘Accounting for the Great Divergence’,

Saito, O. and Takashima, M. (2015a), ‘Population, Urbanisation and Farm Output in Early Modern Japan, 1600–
1874: a Review of Data and Benchmark Estimates’, Hitotsubashi University RCESR Discussion Paper Series No.

Saito, O. and Takashima, M. (2015b), ‘Estimating the Shares of Secondary- and Tertiary-sector Output in the Age of
Early Modern Growth: the Case of Japan, 1600–1874’, Hitotsubashi University RCESR Discussion Paper Series No.

Shimbo, H. and Hasegawa, A. (2004), ‘The Dynamics of Market Economy and Production’, in A. Hayami, O. Saito
and R. P. Toby (eds.), Emergence of Economic Society in Japan 1600–1859, Oxford University Press, 159–91.

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Perspective, 1000–1800, Leiden: Brill.


Japanese industry during the Second World War

Tetsuji Okazaki

The period during the Second World War was distinctive in the economic history of modern Japan, in the sense that
planning and control by the government substituted for a market mechanism in a substantial part of the economy in
this period. Under this regime, the government mobilized huge resource for the war, and the Japanese economy
experienced dramatic changes in resource allocation both between industries and within each industry. On the one
hand it resulted in a sharp decline in people’s living standards, but on the other hand it enabled Japan to increase
munitions production rapidly, including aircraft production, which had been at an infant stage before the war.

The extent of the wartime mobilization of resources is clearly observed in the composition of real gross
national product (GNP) (Figure H5.1). The outbreak of full-scale war with China in 1937 had a substantial impact
on the Japanese economy. Government expenditures, including military expenses, sharply increased, and private
capital formation simultaneously increased. This increase of private investment reflected a policy of expanding the
productive capacity of munitions and related industries. These two components – government expenditures and
private capital formation – continued to absorb an increasing fraction of GNP. In contrast, private consumption and
exports continued to decline.

Figure H5.1 Change in the composition of national expenditure in Japan during the Second World War

Source: Economic Planning Agency, Kokumin Shotoku Hakusho (Whitepaper on National Income), 1963 issue,
Tokyo: Printing Bureau of Ministry of Finance, 1965, 178–79.

The change in composition of GNP corresponds to the change in the industrial structure. Production of iron,
steel, machinery and coal continued to increase until the final stage of the war. It is especially notable that the rate of
increase in the production of machinery, including aircraft and ships, accelerated in 1937. Meanwhile, the
production of textiles declined sharply from 1938. This reflects the fact that textiles were mainly produced for
domestic consumption and export.

From the early stages of the war, the Japanese government substantially intervened in the economy through a
system of planning and control, and then it expanded and strengthened the intervention as the war progressed. Given
the general price controls imposed in 1938, a number of commodities – including rice, coal, raw cotton, iron ore and
steel – were distributed according to the Material Mobilization Plan (Busshi Doin Keikaku), which was drawn up by
the government, and more specifically by the Cabinet Planning Board (Kikakuin) or the Ministry of Munitions
(Gunjusho) after November 1943. International trade, allocations of funds and the labour market were all
government controlled. In order to implement these economic controls, the government often used trade
associations, except for the munitions industries that were directly administered by the Army and Navy. From 1941
those associations, which came to be called ‘control associations’ (toseikai), were given legal authority to supervise
and instruct the firms under their control (Okazaki and Okuno-Fujiwara 1999).

By this system of planning and control, as we have already seen, resource allocation between industries
changed substantially, which in turn had a substantial impact on each industry. Let me focus on the coal and aircraft
industries to illustrate how the system worked. Because coal was an important and domestically available energy

source, the coal industry was requested to increase its wartime production. Indeed, according to the Production
Capacity Expansion Plan (Seisanryoku Kakuju Keikaku) of January 1939, coal production was expected to increase
1.6 times from 1938 to 1941.

In contrast, the allocation of intermediate goods and capital goods, such as steel and explosives, was not
augmented to the same extent, due to shortages of those goods. In this situation, the government and the Coal
Control Association (Sekitan Toseikai) made great efforts to mobilize the labour force into the coal industry,
including workers from Korea. Simultaneously, they concentrated resources on relatively efficient coal mines,
whereas inefficient mines were closed and their labour force was moved to relatively efficient mines. This policy of
resource reallocation, from inefficient mines to efficient ones, contributed to raising the average productivity of the
entire coal industry, thereby mitigating the negative impact of the degenerating economic environment (Okazaki

The aircraft industry was the industry that expanded most sharply during the war. Indeed, the number of
airframes produced increased 5.5 times from 1941 to 1944. As mentioned above, the Army and Navy used their
powers to directly administer this industry in order to concentrate resources. The factor critical to aircraft production
was the supply of parts, because aircraft require numerous parts. Hence, major aircraft producers including
Mitsubishi Heavy Industries Co. and Nakajima Aircraft Co. organized a number of parts suppliers. The rapid
expansion of aircraft production was achieved through this extensive outsourcing; however, US strategic bombing
eventually destroyed these networks and seriously damaged the industry (Okazaki 2011).


Okazaki, T. (2011), ‘Supplier Networks and Aircraft Production in Wartime Japan’, Economic History Review 67
(3): 973–94.

Okazaki, T. (2014), ‘Productivity Change and Mine Dynamics: the Coal Industry in Japan during World War II’,
Jahrbuch für Wirtschaftsgeschichte 55 (2), 31–48.

Okazaki, T. and Okuno-Fujiwara, M. (eds.) (1999), The Japanese Economic System and its Historical Origins,
Oxford University Press.



Debin Ma

In the two millennia dynastic history of China, the five centuries of 1500–2000 encompass four political regimes,
the Ming (1368–1644), Qing (1644–1911), Republican (1911–49) and Communism since 1949. The five centuries
saw regime changes and dramatic ideological shifts and reversals (especially following the collapse of Qing in 1911,
the last imperial dynasty) as well as the resilience of historical and political legacy.

This chapter provides a brief account of major economic changes in the last five centuries and offers some
major quantitative indicators on long-term welfare. The emphasis of the narrative is on the importance of ideological
and institutional changes to China’s long-term economic trajectory.

The beginning century of our study marked the final century of Ming’s imperial dynastic rule. It was a century that
also saw the maturing of a highly centralized, unitary political regime governed by an absolutist emperor at the top
of the power pyramid, aided by a formal bureaucracy recruited through a highly structured national Civil Service
Examination rooted in Confucius classics. But whatever impersonality and neutrality remained of China’s imperial
regime, they were more than often compromised by the emperor’s personal rule, and his personal entourage of
eunuchs, consort and other inner court staffs (Ma 2012). Beyond the borders of China, Ming and Qing reigned
supreme in East and Southeast Asia throughout the so-called tributary states trade system, where neighbouring small
states remained in the status of near protectorate under which limited trade was conducted. China remained more or
less isolated politically beyond East Asia until aggressive Western imperialism reached its shore by the mid-
nineteenth century.

The claim that China was the world’s leading economy in the fifteenth to eighteenth centuries was somewhat
misleading based on a conflation of aggregate for the per capita terms. Maddison (2007) was credited with the claim
of China being the world’s leading economy; based largely on guesstimates, he puts China’s annual income at about
500 or 600 international dollars (in 1990 prices), at about 80 per cent (in 1500) and 35 per cent (in 1700) of the
world’s leading but much smaller economies of the time, Britain and the Netherlands. But Maddison was right in
trumpeting the aggregate size of the Chinese economy. Entering into Qing, China saw a doubling of territory and a
tripling of population between the fifteenth and eighteenth centuries. No single political entity at the time achieved
such size in both geography and population under such stability and durability unified under a single political

Chinese trade with neighbouring Asian states and further beyond remained limited but could be critically
important. With the export of silks and tea, China fuelled the fetish of Chinosoirées in western Europe, which
formed the basis for import substitution within western Europe. On the other side of the trade equation, inflow of
Latin American silver ingots and coins greased the engine of Chinese commerce and supported the monetization of
public finance from the sixteenth century. Introduction of new world crops such as maize and potatoes sustained the
tripling of population in Qing. But it will be a far cry to claim that any of this gave the Chinese economy the leading
position that it may have held in the early centuries of the second millennium as under Song (960–1279).
Commercial, financial, political, technological and scientific revolutions that engulfed a fragmented, contentious
Europe have largely eclipsed the states of Ming and Qing, only to haunt them by the mid-nineteenth century.

Recent new attempts at constructing new long-term gross domestic product (GDP) series, most notably by
Stephen Broadberry, Hanhui Guang and David Li, seem to confirm largely the earlier Maddison estimate (Bolt and
van Zanden 2014). We can get a better glimpse of a more comprehensive profile of the evolution of Chinese living
standards and human capital in the nineteenth and twentieth centuries based on integrated estimates of real-wage and
anthropometric evidences. These confirm a general decline in living standards and human capital after the mid-
nineteenth century followed by a recovery only at the turn of the century (Figure 6.1; on the wage evidence, see
Allen et al. 2011). Chinese heights fell back relative to Taiwan during the late nineteenth century, for example.
Japanese stature was still much lower. The Japanese reached the Chinese height level only during the 1980s

although, as argued by Baten et al. (2010), the level of Japanese heights cannot be directly compared to the Chinese
as a welfare indicator.1

Figure 6.1 Height in East Asian countries (male)

Source: based on Baten and Blum (2014).

The real wage data also reveal that Chinese living standards were probably closer to the less developed parts of
Europe but lower than north-western Europe in the eighteenth and nineteenth centuries. These reviews confirm that
the divergence in living standards and per capita incomes between Europe and China already existed before the
industrial revolution and only widened from the nineteenth century onwards. However, in contrast to the findings
based on real wages and heights, the basic numeracy index – a measure of tendencies to report a rounded rather than
an exact age – reveals a relatively high level of Chinese human capital, closer to that of north-western Europe for the
eighteenth and nineteenth centuries, than to countries with a comparable level of living standards, such as India or
Turkey (Figure 6.2). In comparison to the high level of Japanese numeracy, Chinese numeracy displayed a slightly
lower level during the nineteenth century.2 In addition, the cohort born during the 1840s, who experienced the
Taiping civil war and famine period when they were teenagers and young adults, had lower numerical skills than the
generations before and after.

Figure 6.2 Basic numeracy in China and Japan

Source: based on Baten et al. (2010).

The nineteenth century: an ominous beginning
The beginning of the nineteenth century may have seen the turn of the tide that had once so favoured the fortune of
Qing.3 Population growth sustained by rising agricultural land productivity and the introduction of new crops may
have finally stretched the limits of the resource constraint. Beginning with the White Lotus (1796–1804), a series of
domestic rebellions, culminating with the vast Taiping uprising (1851–64), both reflected and contributed to the
erosion of the Qing regime. Externally, following the collapse of the East India monopoly in 1833, British
imperialism driven by private commercial interest intensified on the Chinese trade. The rise of triangular trade, the
export of Indian opium to China, reversed China’s long-standing trade surplus, draining silver species out of China.
This occurred in the background and during the sixteenth and seventeenth centuries fiscal reform under mid-Ming
led to the silverization of fiscal revenue and increasing penetration of silver used as a medium of exchange in the
next two and three centuries. The increasing scarcity of silver species, as reflected in the rising copper cash–silver
ratio, was wreaking havoc on people’s livelihoods and governmental tax collection, as well as the morale of the
military (Lin 2006). Prompted by an urge to act but armed with little knowledge of the potency of the newly rising
Western imperialism, Qing’s military confrontation with England in the now famous Opium War of 1842 turned out
to be a humiliating defeat and also marked the beginning of the world’s largest and most remote empire now in the
orbit of Western imperialism. British arms forced the Qing to accept the Treaty of Nanking (1842), which ceded
Hong Kong to the British, imposed a regime of virtual free trade, and initiated the ‘treaty port’ system by opening
five Chinese ports to British merchants. This agreement, which set the tone of China’s international economic
relations during the century prior to the Pacific War, subsequently expanded to include dozens of treaty ports where
foreign residents were protected by extraterritoriality at the expense of Chinese sovereignty. The challenge of
Western imperialism represented an external threat drastically different from China’s traditional nemesis from her
northern frontier and hence marked a watershed in Chinese history. The challenge was economic, political,
institutional and ideological.

Political accommodation and institutional adjustment to 1895
The new era marked by China’s forced opening under Western imperialism started off disastrously for the Qing,
who were brought to the brink of collapse by the devastating Taiping Rebellion (1850–62). The Qing under the so-
called Tongzhi Restoration (1861–75) also engineered a remarkable economic recovery through the revitalization of
traditional institutions: the reinstatement of Confucian orthodox, the restoration of the National Civil-Service
Examination (largely interrupted during the Taiping Rebellion), and the initial exemption of land taxes to lure
cultivators back to war-torn agricultural regions.

Neither did the Qing remain entirely passive to Western incursions. As a natural extension to the Tongzhi
Restoration, powerful regional bureaucrats such as Li Hongzhang and Zhang Zhidong sponsored the Self-
Strengthening Movement (1860–94), a programme that aimed to expand Chinese military strength by developing a
small number of Western-style, capital-intensive enterprises financed by the state and directed by prestigious
officials who possessed the highest credentials awarded under the Confucian academic system. Although these
enterprises, which included arsenals, factories and shipyards, were fraught with inefficiency and corruption, they did
manage to record modest achievements. Nonetheless, the overall ideological orientation during this period remained
conservative. In contrast to the concurrent Meiji reform in Japan, there was no introduction of any reforms that
touched the fundamentals of the traditional regime: no introduction of modern constitution or commercial law; no
reform in the currency system; modern banks or modern infrastructures such as railroads were expressly prohibited;
and steamships were limited to major river ways such as the Yangzi river.

The direct impact of the treaty port system, where Chinese trade tariff was restricted to a modest 3 or 5 per
cent, was the expansion of China’s international trade. China’s Maritime Customs data show real imports more than
doubling in the two and a half decades prior to 1895, and exports increasing by half of this. Trade statistics suggest
slower growth of real trade in the range of 2–3 per cent per annum after 1895. Despite its modest scale, trade
gradually pulled major domestic commodity markets into close alignment with exchange throughout the Pacific

The treaty system accelerated the arrival of new technologies, initially to the treaty ports themselves, which in
both the nineteenth and twentieth century versions of global entry became staging points for the spread of
technologies into the domestic economy. However, it was in this area where we see industrialization lagging far
behind the opportunities opened up by the inflow of trade and technology during this era. Attempts by Chinese and
European entrepreneurs to take advantage of new opportunities linked to new technologies and new trade
arrangements reveal the presence of powerful obstacles to innovation within China’s late Qing economy. These
barriers were, among others, low investment activity of the government on the one hand, which limited the
expansion of key public infrastructure such as modern railroads and inland steam shipping. The second barrier is the
resistance of existing vested interests in the form of traditional mercantile and handicraft guilds, who, in connection
with local government, defended their traditional monopolistic privilege and obstructed introduction of new
technologies and new business arrangements in the processing of agricultural commodities like soybeans and silk
larvae. (For details on these obstacles, see section 4.2 in Brandt et al. 2014.)

The onset of China’s Industrial Revolution 1895–1949
China’s defeat in the Sino-Japanese War of 1894–95 by a nation long regarded as a student rather than an equal
marked the end of the Self-Strengthening Movement, which events revealed to be feeble and ineffective. This
ignominious military failure inflicted a profound mental shock on Chinese elites and the public at large. The
immediate economic impact followed the 1896 signing of the Treaty of Shimonoseki, which granted foreigners the
right to establish factories in the treaty ports. Eliminating the prohibition against foreign factories in the treaty ports
sparked a rapid expansion of foreign direct investment. This new arrangement indirectly legitimized Chinese
modern enterprises. Despite some setbacks from the repression of the Hundred Days’ reform centred in the southern
province of Hunan in 1898, followed by the subsequent debacle surrounding the Boxer Rebellion in 1900, the Qing
constitutional movement of 1903–11 was far more comprehensive and ambitious. It aimed at steering China towards
a constitutional monarchy by drafting a formal modern Constitution with national, provincial and local level
parliaments. Military modernization was high on the reform agenda. Administrative reforms sought to modernize
public finance and adopt a national budget. The reform initiative gave birth to new Ministries of Education, Trade
and Agriculture and encouraged the founding of local chambers of commerce. There were policy initiatives aimed at
currency reform, efforts to establish modern banks and to expand railroads and other public infrastructure (Tables
6.1 and 6.2).

Table 6.1 1934–36 East Asian per capita GDP in 1934–36 US dollars and relative to the US

US Japan Taiwan Korea China

Per capita GDP
based on exchange
rate conversion

574.7 77.1 49.2 29.1 20.1

100% 13.4% 8.6% 5.1% 3.5%

Per capita GDP
based on purchasing
power parity

574.7 180.8 129.6 70.9 63.6

100% 31.5% 22.6% 12.3% 11.1%

Source: adapted from Fukao et al. (2007), Table 8.

Table 6.2 GDP structure in East Asian countries (%)

China Japan Taiwan Korea

1914–18 Agriculture 71 29 48 66

Industry 8 20 29 7

Services 21 51 23 24

1931–36 Agriculture 65 19 44 53

Industry 10 28 27 13

Services 25 53 29 34

Annual per capita
net domestic product
(NDP) growth rate
between 1914–18
and 1931–36

0.53 1.4 1.5 1.1

Source: adapted from Ma (2008), and sources cited therein.

Beginning at the very end of the nineteenth century, activity in mining and manufacturing accelerated sharply
from its small initial base. Overall industrial output showed double-digit real annual growth during 1912–36, a
phenomenal result for that period, especially in view of China’s turbulent political scene and the impact of the Great
Depression. Factory production, initially focused on textiles, food processing and other consumer products,
concentrated in two regions: the lower Yangzi area, where both foreign and Chinese entrepreneurs pursued factory
expansion in and around Shanghai, and China’s north-east or Manchurian region, where Japanese initiatives
predominated (see Map 6.1). By 1935, Chinese factories, including some owned by British or Japanese firms,
produced 8 per cent of the world’s cotton yarn (more than Germany, France or Italy) and 2.8 per cent of global
cotton piece goods production. Despite the importance of foreign investment in Shanghai and especially in
Manchuria, Chinese-owned companies produced 73 per cent of China’s 1933 factory output growing production of
light consumer and industrial goods. This combined with the accumulation of experience in operating and repairing
modern machinery, which generated backward linkages that spurred new private initiatives in machinery, chemicals,
cement, mining, electricity and metallurgy. Official efforts (including semi-official Japanese activity in Manchuria)
also promoted the growth of mining, metallurgy and arms manufacture (Rawski 1989: ch. 2).

Map 6.1 Regional economic specialization in China 1895–1949

Source: see map 1.1.

China’s economic prospects acted as a magnet for trade and investment during the pre-war decades. China’s
foreign trade rose to a peak of more than 2 per cent of global trade flows in the late 1920s, a level that was not
regained until the 1990s (on China’s presence on world exhibitions, see Highlight Chapter 6.1). Between 1902 and
1931, inflows of foreign direct investment grew at annual rates of 8.3 per cent, 5 per cent and 4.3 per cent for
Shanghai, Manchuria and the rest of China. By 1938, China’s stock of inward foreign investment amounted to
US$2.6 billion – more than any other underdeveloped region except for the Indian subcontinent and Argentina.
Although estimates of pre-war capital flows often blur the distinction between direct and portfolio holdings, it is

evident that China played a substantial role in global capital flows. The 1938 figure of US$2.6 billion for China’s
stock of foreign investments amounts to 8.4 per cent of worldwide stocks of outward foreign investment and 17.5
per cent of outward foreign direct investment in that year. By contrast, China’s 2001 share of worldwide inward
foreign direct investment was only 2.1 per cent. Domestic investment also showed substantial growth. ‘Modern-
oriented’ fixed investment (calculated from consumption of cement, steel and machinery) grew at an average annual
rate of 8.1 per cent between 1903 and 1936, outpacing Japanese gross domestic fixed capital formation in mining,
manufacturing, construction and facilitating industries, which advanced at an annual rate of 5 per cent. Despite the
effects of the Great Depression and political tumult, economy-wide gross fixed investment exceeded 10 per cent of
aggregate output during 1931–36 (Brandt et al. 2014).

Transport development contributed substantially to economic expansion. China’s railway track length grew
from 364 kilometers (km) in 1894 to over 21,000 km by 1937, and newly constructed north–south lines slashed
economic distances across a landscape dominated by rivers flowing from west to east. Completion of railway and
telegraph connections linking Peking (now Beijing) and the central China river port of Wuhan in 1906 reduced the
time needed to ship commodities between these cities. In a remarkable triumph of a free banking version of the
silver standard, privately held Chinese banks, often cooperating with foreign financial institutions and traditional
money shops, transformed the financial face of China by persuading households and businesses to transact with
paper banknotes that were convertible into silver on demand. This monetary transformation reduced transaction
costs. The expansion of branch networks allowed major domestic banks to attract deposits from all regions and
recycle them to the areas of greatest demand, contributing to the emergence of an embryonic national market for

These forces resulted in increased per capita output and structural changes of the sort associated with Simon
Kuznets’ concept of modern economic growth in two major regions: the Lower Yangzi, where private domestic and
foreign investment in and around Shanghai served as the key driver (Ma 2008) and the north-east (Manchuria),
where Japanese investment and eventual takeover provided key momentum. All in all, these developments in
industry, transport and finance precipitated an episode of modern economic growth at the national level during the
early decades of the twentieth century.

Beginning in 1929, China’s economy faced a succession of shocks arising from the Great Depression and
falling export demand, the severance of Manchuria in 1932 by the Japanese, rapidly rising silver prices triggered by
Britain’s decision to go off gold and the United States Silver Purchase Act of 1934. Considerable debate persists
over how well the Chinese economy weathered the storm and the severity of the combined impact of these events on
aggregate economic activity. There is little controversy about what followed. Twelve years of war, with large-scale
civil strife following the defeat of Japan’s invading armies, battered China’s economy and rolled back much of the
progress achieved during the preceding decades. Roaring inflation crippled China’s financial sector and corruption
hobbled the public sector and embittered the populace.

People’s Republic of China in 1950–2000
The broad contours of economic change following the establishment in 1949 of the People’s Republic of China
(PRC) are well understood.4 The new Communist government quickly implemented an orthodox mix of fiscal and
monetary policies to restore fiscal balance and quell hyperinflation, steps that helped facilitate recovery from
damage inflicted by twelve years of war and civil strife. Following violent campaigns that expropriated the assets of
urban and rural elites, the PRC moved to implement socialist planning. The new regime swept away the remnants of
several Qing-era institutional constraints on growth, completing a process that had begun prior to the Second World
War. The new government vastly expanded state control over resources, rapidly eliminating the long-standing
shortage of fiscal revenue that had prevented earlier governments from financing aggressive development initiatives.

China’s plan system, introduced with Soviet advice during the early 1950s, bore strong resemblances to its
Soviet counterpart. But starting in 1958, China distanced itself both from Moscow’s political leadership and from
Soviet economic strategy, as Mao Zedong embarked on a daring campaign to accelerate the pace of development by
amalgamating rural households into large-scale collective units, or People’s Communes, and by promoting rural
industrialization. The communes proved to be a costly failure: poor incentives, false reports of rising crop output,
excessive grain procurement and a massive reallocation of labour from agriculture to industry inflicted an immense
famine on China’s peasantry that cost tens of millions of lives in the so-called Great Leap Famine of 1959–61.
Efforts to revive forward momentum in the early 1960s met with some success, but the economy suffered further
setbacks in the mid-1960s when a new political campaign known as the Cultural Revolution sparked a new reversal
in economic policies and incentive mechanisms.

Mixed economic outcomes characterize China’s quarter-century of socialist planning under Mao and his
colleagues. The plan era brought notable expansion of industrial and technological capabilities, as well as major
improvements in literacy, school attendance, maternal and infant survival rates, public health and life expectancy.
Real annual GDP growth of roughly 6 per cent (aggregate) and 4 per cent in per capita terms surpassed gains in
India, Pakistan, Indonesia, Egypt, Brazil and other large low-income nations, often by large margins. These
successes were accompanied by shortcomings and setbacks, which occurred in part because the PRC government,
while eliminating institutional barriers inherited from the past, used its unprecedented administrative capacity to
implement a succession of anti-economic policies, including an assault on individual and firm-level incentives,
persecution of intellectuals and educators, forced collectivization of farming and a destructive regimen of local self-
reliance. In addition, unsuitable technological innovations diffused in both agriculture and industry, and cross-border
flows of trade, investment, people and information were severely constricted. A substantial gap emerged between
the living standards of urban and rural households. Overall, food supply measured as a percentage of the total
population scarcely increased between 1958 and 1978 (Brandt et al. 2014).

The death of Mao Zedong (1893–1976) was widely recognized as the end of an era for both the PRC and for
China’s economy. China’s reform initiatives of the late 1970s focused on four areas: rural liberalization, expansion
of foreign trade and investment, policies aimed at ‘enlivening’ state-owned enterprises and fiscal decentralization.
Despite obvious limitations, we can see in retrospect that China’s initial reforms represent a watershed in Chinese
economic history: for the first time, China’s economy avoided most of the Qing-era institutional constraints as well
as the most restrictive of the fresh obstacles imposed by the PRC. The greatest success occurred in the rural

economy, where the explosive response to implementation of the household responsibility system banished the
spectre of food shortages and sparked the largest episode of poverty alleviation in human history. Rural economic
revival, however, went far beyond an intensification of effort in response to the restoration of individual incentives.
The reform unleashed a torrent of entrepreneurship in rural areas and later in the cities. Rapid expansion of
international trade and investment eliminated long-standing shortages of foreign exchange, began to tap the wealth
and expertise of overseas Chinese and multinational corporations and introduced a long-absent element of economic
rationality into investment policies by channelling resources into labour-intensive export production that matched
China’s resource endowment. Efforts to upgrade state enterprises were far less successful, and losses mounted
despite massive direct and indirect subsidies. China’s economy throughout much of the 1980s was a halfway house
combining elements of old and new. Although the reform process spawned episodes of social unrest – the 1989
Tian’anmen protests in part reflected public anger over inflation and corruption – overall, the first fifteen years of
reform produced no substantial group of losers – a rare outcome in episodes of substantial socio-economic change
(Naughton 2007, Xu 2011).

Despite fifteen years of GDP growth averaging 8 per cent per annum, China was at a critical crossroads during
the early 1990s. Growth had become highly cyclical, with successive periods of liberalization and reform
accompanied by high growth but also higher rates of inflation. In the mid-1990s, China’s policymakers attacked
these difficulties with a remarkable sequence of policy changes. These included a sweeping overhaul of the fiscal
system, a reorganization of the financial system, a comprehensive restructuring of the enterprise sector – including
the furloughing and eventual dismissal of over 50 million redundant employees, most in the state sector – substantial
privatization of both state and collective enterprises, along with further reforms – including virtual elimination of
planned allocation of materials – and broad embrace of globalization that reduced tariffs and other trade barriers in
advance of its 2001 entry into the World Trade Organization. These reform efforts were far more systematic and
aggressive than during the early years of reform. They contributed to China’s enormous growth spurt from the
1990s, setting China on course to first surpass the Japanese economy and to possibly become the world’s largest
economy in due course.

The Chinese economic miracle has stimulated efforts to define a ‘Chinese model’ of growth or to establish a
‘Beijing consensus’ of development-enhancing policies. However, China’s recent economic success should also be
seen by the deep historical roots of China’s current institutional structure and the central role of China’s unusual
legacy of human capital. While historic accumulation of resources and capabilities deserves recognition as an
important contributor to China’s recent growth, historical legacy may well become a burden to China’s economic
future as it had impeded China’s response to challenges in the past. Despite three decades of near double-digit
economic growth and wrenching social transformations, the Chinese political system remains highly centralized,
authoritarian, lacking in transparency, rule of law but rife with corruption, with restrictions of public opinion and
freedom of information or expression. How the Chinese economy would fare under this political regime in the face
of rising expectations and increasing globalization remains to be seen.

The five hundred years of Chinese economic history are marked by both continuity and radical departures,
accompanied by long periods of inertia and stagnation as well as dramatic historical breakthroughs and fundamental
transformations. While it is difficult to describe five hundred years in any simplistic categories or terminologies, two
features stand out. First, change – or lack therefore – in ideology and political regime are critical to the long periods
of economic change and episodes of historical transformation. Second, the rise of mid-nineteenth century Western
imperialism proved to be a watershed that shaped and reshaped the Chinese search for a new response and
ultimately a new identity in the name of modernization in the centuries to follow. Third, while external influence or
shock (such as the Western imperial challenges from the mid-nineteenth century) were critical, given both the
immense size of China and the highly authoritarian and centralized nature of the traditional Chinese polity,
collective political and institutional responses were often staggered and required significant mobilization of
indigenous political capital. A better reading of the Chinese past helps us better understand the enormity of the
Chinese transformations in the road ahead, even though China’s future may still defy any easy prediction.


1. The Japanese diet of the nineteenth and early twentieth century is characterized by an absence of animal
protein, see Baten et al. (2010). The Japanese during this period had lower height levels than most other
populations at any level of per capita income.

2. For more details on Japanese living standards, see Chapter 5 on Japan by Osamu Saito in this volume.

3. The narrative from here draws heavily from Brandt et al. 2014.

4. For the differential trajectory of post-Second World War Japan, see Chapter 5 in this volume.

Further reading

Brandt, L., Ma, D. and Rawski, T. G. (2014), ‘From Divergence to Convergence: Re-evaluating the History Behind
China’s Economic Boom’, Journal of Economic Literature 52 (1), 45–123. An extended survey article of Chinese
economic history in the last three hundred years with a very comprehensive bibliography.

Brandt, L. and Rawski, T. G. (eds.) (2008), China’s Great Economic Transformation, Cambridge University Press.
A fairly comprehensive collection of important chapters summarizing China’s economic transformation during the
past three decades.

Ma, D. (2012), ‘Political Institution and Long-run Economic Trajectory: Some Lessons from Two Millennia of
Chinese Civilization’, in M. Aoki, T. Kuran and G. Roland (eds.), Institutions and Comparative Economic
Development, Basingstoke: Palgrave Macmillan, 78–98. A relatively short but succinct overview of major political
episodes in Chinese economic history from the perspective of institutional economics.

Maddison, A. (2007), Chinese Economic Performance in the Long Run. 2nd edn., rev. and updated, Paris:
Development Centre of the Organisation for Economic Co-operation and Development. A good survey of the
Chinese economy offering a quantitative historical profile of economic indicators.

Perkins, D. H. (1969), Agricultural Development in China, 1368–1968, Chicago: Aldine. A pioneering book on
long-term economic history of China.

Perkins, D. H. (ed.) (1975), China’s Modern Economy in Historical Perspective, Stanford University Press. A good
collection of some important articles on Chinese economic history.

Pomeranz, K. (2000), The Great Divergence, Princeton University Press. An important book that set off the so-
called Great Divergence debate and offers a comprehensive survey of the Qing economy.

Rawski, T. G. (1989), Economic Growth in Prewar China, Berkeley: University of California Press. Remains one of
the most comprehensive books on the Chinese economy in the first three decades of the twentieth century.

Rawski, T. G. and Li, L. M. (1992), Chinese History in Economic Perspective, Berkeley: University of California
Press. A good collection of chapters on Chinese economic history.


Allen, R., Bassino, J.-P., Ma, D., Moll-Murata, C. and van Zanden, J. L. (2011), ‘Wages, Prices, and Living
Standards in China, Japan, and Europe, 1738–1925’, Economic History Review 64 (S1), 8–38.

Baten, J. and Blum, M. (2014), ‘Why are you Tall while Others are Short? Agricultural Production and other
Proximate Determinants of Global Heights’, European Review of Economic History 18, 144–65.

Baten, J., Ma, D., Morgan, S. and Wang, Q. (2010), ‘Evolution of Living Standards and Human Capital in China in
18–20th Century’, Explorations in Economic History 47 (3), 347–59.

Bolt, J., and van Zanden, J. L. (2014), ‘The Maddison Project: Collaborative Research on Historical National
Accounts’, Economic History Review 67 (3), 627–51.

Fukao, K., Ma, D. and Yuan, T. (2007), ‘Real GDP in pre-War East Asia: a 1934–36 Benchmark Purchasing Power
Parity Comparison with the US’, Review of Income and Wealth 53 (3), 503–37.

Lin, M. (2006), China Upside Down: Currency, Society, and Ideologies, 1808–1856. HUAC-Harvard University

Lin, M. (2008), ‘Economic Growth in the Lower Yangzi Region of China in 1911–1937: a Quantitative and
Historical Perspective’, The Journal of Economic History 68 (2), 385–92.

Naughton, B. (2007), The Chinese Economy: Transitions and Growth, Cambridge, MA: MIT Press.

Xu, C. (2011), ‘The Fundamental Institutions of China’s Reforms and Development’, The Journal of Economic
Literature, 49 (4).


International expositions and East Asia’s
participation in the modern era

Ma Min

The idea of international expositions was born in the UK during the Victorian Period. In 1851 the UK hosted the
unprecedented ‘Great Exhibition of the Works of Industry of All Nations’, which showcased its overwhelming
power to the rest of the world. In the following over 160 years, more than 120 international expositions were hosted
by different nations. Among them, the biggest one, participated by all nations, was called World Exposition, and
usually held every five years.

After its emergence in Europe, the exhibition exerted great influence on East Asia with the trend of eastward
spread of Western culture, while the responses from the East Asian countries varied from each other.

Japan gave the promptest response. In 1862 when the second World Exposition was held in London, the
visiting delegation was invited to the opening ceremony, which was the first attendance by the Japanese. When it
came to the 1867 Paris World Exposition, the Tokugawa Shogunate sent its representatives to participate and exhibit
porcelain, lacquer and copper utensil and local craft works. Japan’s first large-scale participation began at the 1873
Vienna World Exposition. During this exposition, the Japanese delegation achieved exceptional success with ninety-
two medals. During the Meiji Period, Japan held five domestic industry exhibitions, each larger than the previous
one and with more visitors.

In 1965, Japan won the bid for the Osaka World Exposition and became the first country in Asia to organize a
World Exposition. The Osaka World Expo achieved unprecedented success and became one of the best World
Expositions in history. It surpassed the previous ones both in terms of the number of visitors and the economic
revenue, with 64 million visitors and US$150 million. Osaka World Exposition became a milestone in its history of
development, technology and culture in contemporary Japan and gave direct boost to the dramatic rise of Japan’s

Chinese participation in the World Exposition began in the late Qing Dynasty, officially also with the 1873
Vienna Exhibition in Austria. Although initially less active than the Japanese, the Chinese government, together
with businessmen, participated in more than twenty international expositions including the World Expo of 1876
Philadelphia, 1878 and 1900 Paris, 1885 New Orleans and 1903 Osaka. After the 1911 revolution overthrew the
Qing Dynasty, participation in the World Expo had been highly valued, aiming at rejuvenating Chinese industry.
Particularly, Chinese media reported some sensational news about the 1915 Panama–Pacific International
Exposition in San Francisco, which raised unprecedented exposition enthusiasm. The newly founded government of
the Republic of China sent an over forty-member delegation to participate in this Exposition. Their main attraction,

the China Pavilion, imitated the architecture style of the Hall of Supreme Harmony and embodied distinctive

national features. In that World Expo, China achieved great success with fifty-six medallions, sixty-seven Awards of
Excellence, and 196 gold medals. However, after the 1933 Chicago World Expo, China took a different path.

Under the circumstance of its reform and opening up, China reappeared in the 1982 Knoxville World Expo.
China showed unprecedented vigour and creativity in that Expo, where the China Pavilion mainly displayed arts and
crafts. In addition, in order to cater to the theme ‘energy’, new energy technology was presented by displaying the
delicate and convenient solar-powered dinnerware outside the China Pavilion, which drew most of visitors’
attention. And the Great Wall bricks and Terracotta Warriors placed under one picture of splendid Great Wall were
greatly hailed. During the following years, China had an increasingly important role in making the World Expo
splendid. For example, in the 1992 Seville Expo, the China Pavilion integrated ancient culture presentation with
modern technology to keep up with the pace of modern international exposition, being awarded ‘Five-star Pavilion’
for its innovative and rich content as well as unique design. Finally, China won the right to host the 2010 Shanghai
Expo, which fulfilled Chinese people’s centennial dream of World Expo. And to Chinese people’s pride, Shanghai
Expo received the most participating countries (242) and the most visitors (over 70 million), which made itself the
most brilliant international exposition world-wide.

Other countries in East Asia and Southeast Asia also actively participated in the international expositions either
by sending delegations or renting exhibition areas. For instance, in the 1900 Paris World Expo, there were also
Korean and Siam (Thailand) Pavilions. The 1993 World Expo was held in Taejŏn, a South Korean Science City,
attracting over 14 million visitors.

For more than 160 years, countries in Eastern Asia had switched their roles from observer to participant, from a
supporting to a leading role, which enabled them to catch up with other countries. The secret lies in the unique way
of Eastern Asia modernization and the common characteristics in Eastern Asia Confucianism Culture Community,
which is quite a broad academic issue and beyond the range of this highlight chapter.


Trade and poverty 1820–1913: when the third
world fell behind

Jeffrey Williamson

Before Hong Kong, Singapore, South Korea and Taiwan had completed their post-Second World War growth
miracle, before China, India and the rest of Asia joined them with double-digit growth rates, and as Africa gained
independence from their European colonial masters, there was a world economic order in place that had been two
hundred years in the making.1 In 1960, income per capita in Asia and Africa was less than 14 per cent of that of
Western Europe. Thus, one characteristic of the 1960 world economic order was the wide gap in living standards
between the rich industrial core and the poor pre-industrial periphery. The second characteristic of the 1960 world
economic order was that the poor periphery exported primary products, while the rich core exported manufactures.
Indeed, 85 per cent of the poor periphery’s exports were either agricultural or mineral products. Commodity exports
and poverty were closely correlated.

The 1960 gap between the West and the Rest lingers on even today. What accounts for it? Some economists
stress institutions, some geography and some culture, but all agree that we must go back five centuries or more to
find the sources of the gap. Let’s start by identifying exactly when the great divergence between the West and the
Rest emerged. In 1820, when the industrial revolution was just warming up in Europe, GDP per capita in the poor
periphery was only half that of the west European leaders. So, whatever explanation one hopes to find for the
appearance of the gap must search for it before the industrial revolution. And we see it as early as 1700, when the
periphery per capita incomes were only 56 per cent of the core. However, the most notable fact is that the gap rose
only very slowly over the centuries before 1820, but rose extremely fast over the century ending at the First World

Two things happened between 1820 and 1913. First, the gap between the rich industrial core in the West and
the poor commodity exporters in the Rest widened dramatically as we have seen. Second, it was also the first global
century, featuring a world trade boom, soaring international financial flows and mass migrations. The correlation
between the world trade boom and accelerating divergence during the first global century is suggestive. A world
trade boom had never happened before and it would not happen again until after the Second World War. The
European economies went open, removing long-standing mercantilist policies and lowering tariffs. Their colonies
did the same, and gunboats forced many others to follow suit. Much of the world integrated their currencies by
going on the gold standard and other currency unions, lowering exchange risk. Led by new steam engine
technologies, the world also underwent a pro-trade transport revolution. As the cost of trade fell dramatically, the
ancient barriers of distance began to evaporate. The telegraph stimulated trade still more, lowering uncertainty about

prices in distant markets. Most importantly, the industrial revolution in Europe raised GDP growth rates many times

faster than what had been common over the previous two millennia, and the demand for everything soared,
especially traded goods. To give world trade another nudge, pax Britannica brought peace.

The first world trade boom occurred at the same time as the acceleration in the great divergence, and
correlations like this invite causal interpretations: did globalization contribute to the great divergence? Before we
answer that question, some important issues must be laid to rest. First, Asia and the rest of the periphery did not
suffer a fall in GDP per capita during the first global century. Furthermore, their GDP per capita growth rates
actually rose from 1820 to 1913. However, the rates were much lower in Asia and the Rest than in the core. Second,
no economist has ever found any evidence or argument that rejects the belief that all participants gain from trade: by
exploiting specialization and comparative advantage, trade raises GDP. But in the long run maybe some countries
gain more from trade than others.

Trade can be growth-enhancing. After all, it can be a conduit for knowledge, modern industrial technology,
pro-growth institutional reform and political liberalism. It can also enhance agglomeration and scale economies in
manufacturing, and foster capital flows and accumulation in capital-deficient countries. Modern economists call this
trade-driven endogenous growth.

But were these growth-enhancing forces weaker or even absent in poor countries exporting primary products?
Did it cause de-industrialization there? Did commodity price volatility retard their growth? Did trade booms
augment the incomes of rent seekers in poor countries, thus suppressing accumulation there? It turns out that that the
answer is yes to all of these questions: during the first global century, the growth gains from trade were huge for the
West and miniscule for the Rest.

How should we measure trade booms? In exploring the correlation between ‘openness’ and growth, economists
often measure the former by trade ratios, that is, exports plus imports divided by GDP. But trade shares may be high
simply because income is high, and trade shares may rise simply because income rises. Thus, a country’s openness
should be measured by the height of the trade barriers around it, barriers that include tariffs, non-tariff barriers,
distance from foreign markets and the cost of transportation to and from foreign markets. All of these fell
dramatically between 1820 and 1913, especially in Asia, and it is changes in the trading environment that induces
changes in the domestic economy. How might the trading environment have improved for Asia and the Rest? Two
ways: by a decline in those trade barriers, and by an improvement in world market prices for their commodity
exports. Both of these induced a rise in their net barter terms of trade (NBTT = the price of exports over the price of
imports). So, if we are looking for ways that trade might have fostered or inhibited growth in the Rest, we need to
look at the magnitude and duration of improvements in their NBTT.

Figure I5/6.1 shows just how dramatic the rise in the NBTT was in the Rest as their commodity export prices
soared and their manufacturing import prices fell. It rose in all poor regions, and it rose very fast. The net result may
have been short run gains from trade, but much lower long-run growth gains compared with the West.

Figure I5/6.1 Middle East: net barter terms of trade, 1796–1913

The first global century fostered trade and growth, but the latter happened mainly in the West. In short, part of
the great rise in the income per capita gap between West and the Rest was due to globalization.


1. This brief summary is taken from my book Trade and Poverty (2011), Chinese trans. in paperback (2013 China
Renmin University Press: Beijing).


Bhattacharyya, S. and Williamson, J. G. (2011), ‘Commodity Price Shocks and the Australian Economy Since
Federation’, Australian Economic History Review 51 (2), 150–77.

Blattman, C., Hwang, J. and Williamson, J. G. (2007), ‘The Impact of the Terms of Trade on Economic
Development in the Periphery, 1870–1939: Volatility and Secular Change’, Journal of Development Economics 82
(Jan), 156–79.

Clingingsmith, D. and Williamson, J. G. (2008), ‘Deindustrialization in 18th and 19th Century India: Mughal
Decline, Climate Shocks and British Industrial Ascent’, Explorations in Economic History 45 (Jul), 209–34.

Dobado González, R., Gómez Galvarriato, A. and Williamson, J. G. (2008), ‘Mexican Exceptionalism:
Globalization and De-Industrialization, 1750–1877’, Journal of Economic History 68 (03), 758–811.

Gómez Galvarriato, A. and Williamson, J. G. (2009), ‘Was it Prices, Productivity or Policy? The Timing and Pace
of Latin American Industrialization after 1870’, Journal of Latin American Studies 41 (Dec), 663–94.

Jacks, D. S., O’Rourke, K. H. and Williamson, J. G. (2011), ‘Commodity Price Volatility and World Market
Integration since 1720’, Review of Economics and Statistics 93 (3), 800–13.

Milanovic, B., Lindert, P. H. and Williamson, J. G. (2011), ‘pre-industry Inequality’, Economic Journal 121 (551),

Pamuk, S. and Williamson, J. G. (2011), ‘Ottoman De-industrialization 1800–1913: Assessing the Shock, its Impact
and the Response’, Economic History Review 64 (51), 159–84.

Williamson, J. G. (2006), Globalization and the Poor Periphery before 1950, Cambridge, MA: MIT Press.

Williamson, J. G. (2011), Trade and Poverty: when the Third World Fell Behind, Cambridge, MA: MIT Press,
Chinese trans. in paperback (2013), Beijing: China Renmin University Press.


Middle East, north Africa and central Asia

Rima Ghanem and Joerg Baten

In recent years, the Middle Eastern region has been characterized in newspaper reports by its many conflicts
between religious and political groups. To understand the present situation, it is important to study the region’s
development over the last few centuries. The first impression of Middle Eastern history is the great heterogeneity of
its development. We cover the geographic region between Morocco and Afghanistan (including the former Soviet
Republics in central Asia and the Caucasus that have a substantial Muslim population). These countries have
experienced multi-faceted development over the past five centuries. However, prominent economic historians of
these world regions, such as Charles Issawi (1982), have distilled some common features that characterized many of
the Middle Eastern countries. One common factor was contact with Europe during the nineteenth century, which
Issawi described as a ‘challenge’. Just before the First World War, European merchants (and sometimes their
governments) had taken over many important positions in Middle Eastern economies outside agriculture. In contrast,
Issawi interprets the developments during the twentieth century as a ‘reaction’ in which many Middle Eastern
political leaders aimed at reducing the European influence. They also tried to mitigate the role of religious minorities
in economic core positions of their countries.

Since Issawi (1982) and Owen (1993) wrote their famous overviews in the 1970s and 1980s, some progress has
been made in the quantitative analysis of long-run economic trends of the Middle East. Most famously, Şevket
Pamuk has presented his estimates of urban real wages and national income estimates for a number of countries in
this region. Coşgel and Ergene (2012) have studied the development of early modern inequality based on tax
registers for northern Anatolia and additional sources. Others have focused on complementary issues that are
discussed below. Another theme that was studied with considerable effort was the development of the ‘biological
standard of living’.1 The development of human stature can serve as an indicator of two key welfare components,
nutritional quality and health. This development was reconstructed for a number of Middle Eastern economies. The
Middle East actually had a relative advantage over Europe during the middle of the nineteenth century (Stegl and
Baten 2009). Since the 1880s, however, there has been a dramatic change in the biological standard of living relative
to Europeans. It seems plausible that this shift in relative welfare also influenced a deep feeling of injustice in the
Middle Eastern population.

Finally, we draw on new research about trends in education and human capital. Though education in the Middle
East was quite developed during the High Middle Ages, various available indicators suggest that Middle Eastern
governments and families underinvested in this core determinant of economic growth and competiveness during the

period beginning with the late Middle Ages. Additionally, the differences among countries within this region of the

world were substantial, and interesting to study in themselves.

Medieval and early modern period
During the medieval period, the technology of the Middle East was superior to that of Europe and knowledge was
flowing from the former to the latter. A good example is medical knowledge. Not only was the ancient knowledge
kept in libraries of the Middle East, but physicians also developed it further. This early progress is visible in
urbanization rates: Bosker et al. (2013) recently estimated the urban share for the geographic area of the Middle East
compared to Europe (Figure 7.1). Clearly, urbanization levels were much lower in Europe. They increased at
roughly the same pace as in the Middle East until approximately 1100. Even if the Middle East remained more
urbanized until 1700, its urbanization apparently reached a plateau after 1100. During the late medieval Mongolian
invasion and plague episodes, it even temporarily declined. In contrast, Europe was converging during the period
1500–1800, and finally overtook the Middle East in 1800 (but note that the later Russian Empire and Scandinavia
are excluded, which would reduce European urbanization).

Figure 7.1 Urbanization rates in the Middle East and north Africa, compared with Europe
Note: the geographic definition is used, which categorizes the Byzantine Empire as a Middle Eastern economy
(though Christian), and Sicily and Muslim Iberia as European (though Muslim in some centuries). Excluded are
Russia, the Caucasus, Scandinavia, Iran and Afghanistan. Only cities with population > 10,000 included.

Source: modified from Bosker et al. (2013).

As it is typical for world regions that have achieved technological and economic leadership in a certain period,
the Middle East saw the formation of large empires, beginning with the Arabic ones of the early medieval period.
The Ottoman Empire massively expanded in the fifteenth century toward the Balkans and south-eastern Europe, and
in the sixteenth century towards the east and north Africa. In the seventeenth century, it stretched from Bosnia to

Iraq and the Arabian Peninsula. In north Africa, only Morocco remained independent (for determinants of imperial
expansion, see Highlight Chapter 7.1).

The quantitative evidence on the economic history of the Middle East during the early modern period is quite
limited. Many historians have speculated that it was a period of decline. They came to this conclusion by noting that
the Islamic Empires of the High Middle Ages were powerful and their scientists very progressive, while travel
reports from the eighteenth century largely portrayed an image of backward technology and poverty. However, it is
not clear whether the development was really an absolute decline rather than a relative one. It might have been that
the level of eighteenth century development was simply somewhat lower than in north-western Europe (that had
developed enormously) because the latter was the basis of comparison.

Trade routes between medieval Europe and Asia that had passed the Middle East shifted. This was one of the
major events in Middle Eastern economic history (Findlay and O’Rourke 2007: 142). During the Middle Ages, the
Middle East earned monopoly profits from the trade of Asian spices and luxury goods with Europe. In the early
modern period, these monopoly profits flowed first to the pockets of the Portuguese, then to the Dutch, and finally to
the British and French. However, the merchants of the Middle East also found additional sources of trading income
such as the trade of Yemenite coffee (Raymond 1973, cited from Owen 1993: 5, see Map 7.1). This change in trade
routes could not have had a very large influence on Middle Eastern economies because trading income affects only a
small part of the population.

Map 7.1 Trade of the Middle East during the late eighteenth century
Note: the borders refer to a later period.

Source: Redrawn and modified after İnalcik, Halil, and Quataert, Donald (eds.), An Economic and Social
History of the Ottoman Empire, 1600–1914, Vol II, Cambridge University press (1994), 726.

Beside the effects of shifting trade routes, there were medieval and early modern demographic shocks; Borsch
(2005) argued that the late medieval plague events and the Mongol invasion hit the Middle Eastern irrigation

economies in Iraq and Egypt particularly hard because they needed a critical mass of population density to keep up
the irrigation systems. The Mamluks who were ruling Egypt in a ‘predatory’ way (Findlay and O’Rourke 2007)
were even less willing to invest in the public works that were necessary for irrigation, as the number of peasants and
hence the rents for the Mamluks dropped after the great plague. While the plague increased real wages in western
Europe, it might have had detrimental effects in the irrigation agricultural parts of the Middle East.

In spite of these interesting hypotheses, information regarding early development in the Middle East is based on
quite fragmentary data. Pamuk and Ozmucur developed more solid evidence on real wage developments in Istanbul
and other large cities. They found that, in general, the development of urban craftsmen’s wages was on a level
similar to southern and central Europe during the sixteenth to eighteenth centuries (Figure 7.2). Clearly, the rich
European north-west had already left Istanbul behind. However, compared with other European cities, Middle
Eastern urban centres maintained a similar welfare level. Ozmucur and Pamuk stressed the fact that their estimates
referred to a specific social group, and it might not be so clear how other groups of society were developing.
However, we would interpret this evidence as plausible support of the view that living standards were at least equal
to most of Europe until the eighteenth century.

Figure 7.2 Real wages of unskilled urban workers
Notes: for European cities, they used Robert Allen’s estimates for unskilled construction workers, wages (in
grammes silver) divided by CPI (in grammes silver). Northw. Europe: Amsterdam, Antwerp and London; Central
Europe: Leipzig and Warsaw; Southern Europe: Valencia.

Source: calculated from Ozmucur and Pamuk (2002).

Nevertheless, the scant evidence that we have on human capital formation suggests that the Middle East did not
participate in the European human capital revolution. Evidence regarding sixteenth-century Maghreb suggests that
basic numeracy equalled only 10 per cent in the late fifteenth/early sixteenth century, and reached approximately 50
per cent in the period between the late sixteenth to early eighteenth century (Juif and Baten 2013). For eighteenth-
century Turkey and Syria, we have estimates in the range of 10–50 per cent (Baten and Ghanem 2014). In the same
period, numeracy in Europe grew from approximately 50 to 90 per cent. Hence, Europe emerged as a dramatically
strong competitor.

Limitations to the ‘rule of law’ at the beginning of the
nineteenth century

What characterized the Middle East at the beginning of the nineteenth century? Many contemporary observers noted
the complicated institutional structure and sometimes the missing ‘rule of law’ (reviewed in Kuran 2011). Taxation
capability was low and rulers often were exploitative; in many cases their ethnic background differed from those of
the ruled (in Iran and Egypt, for example).

However, some regions actually benefited from low levels of the rule of law, such as the Maghreb pirates. In
Algeria and Tunisia, an important additional element was the pirate economy of the seventeenth and eighteenth
centuries. Originally created by a tradition of holy war against the Christians, privateering was developing into an
industry for the Algerian and Tunisian port cities.2 Ships whose owners were not willing or able to pay a substantial
fee were captured, and the surviving personnel sold on slave markets if no ransom was paid. Some Christians who
accepted conversion also joined the corsair fleet as renegades. Contrary to the reputation of privateering, corsair
activity was a well-organized business. It involved many different actors. As for Tunis’ pirates, a pirate crew
consisted of at least the ship owner, captain, naval crewmen and armed warriors. The latter were mostly former
hostages. Although the hostages were violently taken, many later joined the pirate business and benefited from it.
Through the trade of booty, they not only acquired wealth but also rose in social rank. Tunis as an expansionary city
of that time welcomed foreigners in its midst and, in return, gained economic profits. Algerian pirates sailed as far as
north-western Europe for slave raids.

In the irrigation economies of Egypt and Mesopotamia, clear property rights and the rule of law would have
been most important, because irrigation agriculture is particularly dependent on clear institutional settings. But even
here, property rights were not always clearly defined. It is very important to understand the structure of property
rights to land in the Middle East, and in Egypt and Iraq in particular.3 In general, land rights were very complicated
(Owen 1993: 33). In principle, the state owned most of the land except for some gardens, orchards and the real estate
on which the houses and the villages stood. However, many families had already begun using some legal tricks to
imitate something like private family ownership at the beginning of the nineteenth century. Generally, the most
secure property rights were established in the Mount Lebanon area, and partially so in Anatolia, lower Egypt and
parts of Syria. In contrast, in southern Syria, upper Egypt, Mesopotamia and Palestine, we have communal
redistribution of land. Each peasant received a new plot of land after the harvest season. Quasi-private ownership
was impossible in this communally organized land tenure system, of course. Only towards the mid-nineteenth
century was there a tendency towards imitating private ownership in these regions. While most of the land was
owned by the state, local rulers could obtain a large part of the tax revenues. In principle, the rules said that between
10 and 50 per cent of the production should be taxed, plus some additional duties. However, this was only a
theoretical tax rate. In practice, a peasant’s skill in hiding part of the production was very important, and those who
were more skilled at hiding were able to achieve a higher standard of living. Tax evasion was quite common, and tax
payers considered this to be legitimate because they received almost no public goods in return. For example, there
was little protection except perhaps against other local lords. Therefore, the peasants protected themselves in
fortified villages.4 The roads and other infrastructure were in a relatively poor state at the beginning of the
nineteenth century, and the irrigation systems were not centrally surveyed.

Iran, with its long history of early cultures and empires, had suffered particularly hard during the late Middle
Ages and the early modern period. Many invasions of nomadic tribes, whose leaders became rulers in this country,
affected it negatively. The relationship between these rulers of nomadic origin and the peasants and merchants of
Iran was always difficult; therefore, their ability to raise regular taxes was low. Hence, arbitrary confiscations were
often used. Relatively unsecure property rights and governmental preference for nomadic tribes resulted in a
reduction of irrigated land and an increase of pastures and wasteland before 1800.5

Urban craftsmen and transport infrastructure around 1800
In contrast to western European proto-industrial production in the countryside, industrial production in the Middle
East was mostly concentrated in the cities (see Map 7.2). Trade in the famous suqs, as well as administration, were
the other main functions of the urban centres. With the exception of Istanbul, the cities themselves were all situated
next to a substantial area of cultivatable land with reasonable soil quality (see Owen 1993: 45). Textile production
was the most important industry, complemented by food-processing, furniture and specialized industries in some
places.6 Even though technological progress in production was slower than in Europe, some industries – such as
Turkish armament producers and shipbuilders – could produce goods at similar levels of quality to those produced
by Europeans (Owen 1993: 46). Obviously, the military interests of the Ottoman Empire required such exceptions.
Most other industries, with fixed price systems and guild systems in which old masters typically commanded
younger apprentices, were not conducive to innovation, even if a certain quality of craftsmanship was preserved.

Map 7.2 Regional economic specialization and export products in the Middle East during the nineteenth century

Source: Redrawn and modified after Tübinger Atlas des Vorderen Orients, Vol. A.X.: Economy during the 19th
century, ed. by SFB 19, Wiesbaden: Reichert, 1980.

Another very important urban function was to organize caravan trade. Complemented by coastal and river-
based trade, the main caravan routes within the Ottoman Empire connected Syria and Mesopotamia (and from there
led to Persia and in some periods to China). A caravan artery went east–west in southern and northern Anatolia and

from there to central Asia. Trade goods comprised textiles and spices from India and Southeast Asia in exchange for
European manufactures, African ivory, skins, ostrich feathers and similar items, as well as a limited variety of
Middle Eastern goods (such as Syrian cotton thread and yarn, and Lebanese silk).7 Black slaves from Africa were
traded northward, and white slaves from Russia and the Balkans were traded southward. Trade within the Ottoman
Empire consisted of grain, sugar, cotton and other products from Egypt in exchange for textiles, soap, dyestuffs and
processed food from Syria and Anatolia. Imports and exports of Mesopotamia were relatively limited, but there was
quite some transit trade, and Persia exported opium, carpets and other products. For overland transport, in addition
to the regular costs for camels and personnel, safety costs were often large. Bedouin tribes required ‘dues’ that could
be as large as three times the normal transport cost (Owen 1993: 54).

In conclusion, the Middle East at the beginning of the nineteenth century showed complicated property rights
and little economic dynamism, although there were exceptions. The systems of production and taxation did not
encourage development; nor were land resources completely used.

Reform period: the early nineteenth century
During the early nineteenth century, the situation in the Middle East changed dramatically. We will focus on three
development paths of the nineteenth century: mild reforms and problematic openness in the Ottoman imperial core,
forced development in Egypt and direct colonization in central Asia and Algeria.

(1) The famous Tanzimat reforms in the Ottoman core (mainly from 1839) fundamentally changed the law,
administration, military and economic situation. Although many fields were affected by the reforms, equality of the
citizenry was perceived as one of the most important. Previously, the Jewish and the Orthodox and Armenian
Christians had a particular status with both advantages (as Muslims saw it) and disadvantages (as the minorities saw
it). After the reforms, all citizens of the Ottoman Empire should have been treated equally – in theory at least. As an
additional component of the reforms, military service was regulated to a maximum amount of five years.

Tax farming, which had been a problematic economic institution, was successively abolished during the
reforms. Previously, a rich tribal leader, merchant or feudal lord could obtain the right to collect taxes after paying a
fixed amount to the government. This caused substantial overtaxing, leading to conflict and inequalities of real tax
burdens because some tax farmers were more effective – and sometimes violent – in their tax collection efforts (but
see Coşgel and Ergene 2012). Finally, an important point was the opening of the Ottoman economy to imports.
European governments also influenced the reforms. It soon became clear that in many fields of industrial
production, the Middle Eastern craftsmen could not compete with their European counterparts, as trade with Europe
was intensified.8

(2) Egypt had a special and remarkable development during the nineteenth century, mainly stimulated by
political changes initiated by Mohammad Ali Pasha. Since Roman times, Egypt had always been ruled by persons
born abroad or with parents from outside of the country, and the Albanian Mohammad Ali Pasha was no exception.
During the forty-two years of his reign, Mohammad Ali reformed the Egyptian state and economy in a radical way.
One of his main aims was to build a strong army that would be able to protect his new state. Reforms were also
applied in the education system, again with the motivation to provide the army with educated leaders but also to
train Egyptians in the skills demanded by modern industry, trade and administrative positions. Many factories were
built and new industries developed during the Mohammad Ali period. Plants for the construction of ships, the
production of chemicals, weapons and other important products were realized. Apart from factories for military
purposes, the textile industry also flourished during this period. Imports and exports were severely controlled
because much of the government budget stemmed from trade revenues organized by marketing boards. Agriculture
was the focus of the reforms. By changing the land property system, building new dams and watering channels,
developing the irrigation system, introducing new crops and controlling planted yields, agricultural production
increased substantially during the early nineteenth century.

Mohammad Ali also created a law of mandatory military service to expand the army. In the end, it included
almost 4 per cent of the population. Egypt had become a military state and participated in many wars during the
nineteenth century, such as in Hijaz, Sudan, Greece and Syria. Ali used his oversized army to develop a power
position for Egypt. He also intended to provide more raw materials to Egyptian industry. The forced development of
military power, agriculture and new industries has similarities to Soviet strategies (but without communism).

Mohammad Ali died in 1848, and his successors adopted different strategies. His son Ismail Pasha encouraged
science and agriculture, and decided to ban slavery in Egypt. During the early 1860s, when US cotton producers
dropped from the world market due to the American civil war, Egyptian cotton production flourished. During the
following period, however, Egypt began to suffer from many disasters including epidemic disease, flood and wars.
Ismail Pasha had to rely on foreign debt to solve these problems, and he could not find a solution to pay back the
increasing foreign debt. The Egyptian economy weakened, and the English and French colonial powers started to
increase interventionist policies, until England transformed Egypt into a protectorate in 1882.

(3) Direct colonization took place in central Asia, the Caucasus and Algeria: Russia began a territorial
expansion, first to the northern steppe of the central Asian region, during the mid-eighteenth century when several
Kazakh tribes called Czarist troops for support. While the Kazakhs interpreted this event more as a temporary
alliance under Russian supremacy, the Czar now considered the northern steppe to be part of the Russian Empire;
however, the imperial administration started to integrate the Kazakh steppe only during the early nineteenth century.
Between 1822 and 1848, the three main Kazakh leaders (the Khans) of the minor, middle and major horde were
suspended. A number of Russian forts were built to control the conquered territories. Russian settlers were provided
with land, reducing the area available for nomadic tribes in the Kazakh steppe. Many of them were forced to adopt
sedentary lifestyles. As a result, in the various regions, between 5 and 15 per cent of the population were
immigrants. This Russian colonization was accompanied by many conflicts between the 1820s and 1840s, during
which the Slavic settlements were often attacked. Russian troops only succeeded in ending this series of rebellions
in 1846.

If we consider the numeracy of Kazakhs, it was quite remarkable (Figure 7.3). During the early nineteenth
century, Kazakhs were actually more numerate than were Russians. However, Russia experienced a human capital
revolution during the nineteenth century, and the colonized Kazakhs could not keep pace. Still, numeracy was higher
than that of the more urbanized central Asians in what later became Kyrgyzstan, for example.

Figure 7.3 Numeracy in central Asia

Source: based on Prayon and Baten (2013).

What could be the reasons for this remarkable early numeracy level? The settler share can most likely explain
part of this, although Russians were a minority in the Kazakh steppe.9 Another factor could be the relatively good
nutritional situation in Kazakhstan. Protein malnutrition that plagued many other populations living in more densely
populated settlements was absent in Kazakhstan. Additionally, in later stages of the process of Russian human
capital development, Russian settlers of the 1870s and 1880s might have stimulated so-called contact learning
(Prayon and Baten 2013). As the Kazakhs observed that Russians were successful with higher investment in human
capital, the Kazakhs tended to adopt this strategy as well.

While the northern steppe only had population densities of about one to two persons per square kilometer, the
southern part of central Asia was more densely populated; its urbanization rate was as high as 15–20 per cent during
the late nineteenth century. This was the region of the old Silk Road, which had connected China with the Middle
East and Europe since ancient times. Famous urban centres such as Samarkand had a remarkably developed
merchant culture. Politically, the region had experienced many different rulers during the early modern period such
as Mongols, Persians and Arabs. Soon after its cities had been conquered and sometimes destroyed, the income of
merchant trade and intensive irrigated agriculture allowed reconstructing them once again. The Russian Empire
invaded the Khanates of Kokand, Bukhara and Shiva during the 1860s, i.e., much later than it invaded the northern
steppe. One motivation was to prevent the British colonial Empire, which had captured Afghanistan, from further
expansion northward. In addition, the intensive cotton agriculture was attractive even more during the 1860s when
the US civil war led to the cotton famine that also affected the textile factories of Saint Petersburg and Moscow. In
contrast to Kazakhstan, military resistance was more limited in the Silk Road region, similar to the northern steppe;
however, some regions lost considerably in numeracy relative to Russia (Figure 7.3). The later region of Uzbekistan
with its capital Samarkand was the most numerate of the whole region and better educated than Russian or Kazakh
regions. However, even before the Russian conquest, numeracy stagnated. During the colonization and
accompanying military destruction in the 1860s, numeracy fell dramatically. After modest recovery, the famous
centre region of the Silk Road was only 75 per cent numerate in the 1880s, almost 20 per cent lower than was

In Algeria, numeracy was also quite high initially but stagnated until the 1870s (Baten and Ghanem 2014). In
contemporary travel reports of the mid-nineteenth century, the indigenous farmer population is described as
unusually industrious and hard-working (Deutsches Staats-Wörterbuch 1857). The military conflicts between the
French and the indigenous Arabs and Berbers were heavy and long; only after the mid-nineteenth century was
Algeria really a French colony. Algeria was – apart from twentieth-century Israel – the country most heavily settled
by Europeans in the Middle East. During the late nineteenth and early twentieth century, the European share was
almost a fifth of the population. The French government aimed at making Algeria an assimilated part of France, and
this included substantial educational investments especially after 1900 (Figure 7.4). The indigenous cultural and
religious resistance heavily opposed this tendency, but in contrast to the other colonized countries path in central
Asia and the Caucasus, Algeria kept its individual skills and a relatively human-capital-intensive agriculture.

Figure 7.4 Numeracy in selected Middle Eastern countries

Source: based on Prayon and Baten (2013).

In summary, we perceive three types of fundamental change: the Tanzimat reforms that opened many
economies to European competition (and deindustrialization); the infant-industry strategy of Mohammad Ali in
Egypt; and the direct colonization, which led to a relative decline in human capital in the Silk Road region and
stagnation on a high level in Algeria.

Why did the Middle East deindustrialize during the nineteenth

Pamuk and Williamson (2010) note that during the eighteenth century, the Ottoman Empire was completely self-
sufficient in textile production, which represented a large share of traded industrial goods. There were even small
exports of carpets, silk and textiles. The share of the textile market that would be covered by domestic producers in
the Ottoman Empire was still close to 100 per cent in 1820; however, between then and 1910, it fell to less than 20
per cent (Pamuk and Williamson 2010).

Pamuk and Williamson (2010) offer a trade-based interpretation of the process during which the Middle East
deindustrialized. They argue that not only were imported British textiles during the nineteenth century
outperforming many local producers, but another important point was the improving terms of trade of cash crops.
Raw cotton prices increased substantially, for example. This change in terms of trade tempted the Middle East to
specialize in this area of production. In spite of deindustrialization and the shift to agriculture, real incomes were
actually growing during the nineteenth century, albeit much slower than in western Europe (Pamuk 2006). When the
terms of trade for these goods declined again during the 1930s, there already was a high degree of path-dependence,
which kept Middle Eastern economies in the cash-crop specialization. One could imagine that deindustrialization
and concentration on agriculture discourages the development of skills.11

Other scholars searched for institutional factors that might have weakened the Middle Eastern economies,
leaving them less competitive. Kuran (2011), for example, argued that institutions of Islamic law that were
appropriate for early periods tended to become handicaps for growth during the nineteenth century. He criticized the
stability of (1) inheritance laws because they did not allow capital accumulation, (2) the lack of legal frameworks for
capital firms, and (3) the religious trusts called waqfs, which locked capital resources into relatively inflexible
institutions. Kuran was convinced that it was not colonialism or religious attitudes per se that was growth retarding,
but the excessive stability of these law concepts. Another institutional interpretation was given by Rubin (2011),
who also criticized the view that Islam per se tended to generate less growth-conducive institutional design. For
example, if interest constraints are considered, both the Christian Church and Islam aimed at restricting interest
during the Middle Ages. This is an obvious example of an institution that limits capitalist development by
constraining credit. In the early phase, Islamic bankers and merchants were actually more successful than Christian
ones in circumventing this religious constraint (Rubin 2011). For example, Rubin reports about the Mukhatara
institution known in Medina during the eighth century. One person bought a good for a certain price, but the other
one bought it back immediately for a higher price to be paid later. However, later on, the development of credit
institutions that circumvented religious constraints was more rapid in Christian Europe. Rubin argues that this was
caused by the need of rulers to be legitimized by religious leaders. This factor became more important in the Islamic
sphere. During the early period of Christianity, the first followers of this religion lived under Roman rule. Christian
religious leaders developed doctrines that implied separated religious and governmental power. This was
comparable to Jesus’ insistence on giving Caesar what belonged to him and God what was his. In contrast, during
the early years of the Muslim religion, political power was weak and the first Caliphs gained their legitimization
from being relatives of Mohammed. The leaders that later followed them felt legitimized by obeying religious rules
very strictly. Although Christian popes and bishops also tried to influence politics – and kings used religion as

legitimization – in Christianity, there was always more tension and sometimes competition between religious and
political leaders (Rubin 2011: 1316–17).

Another factor that limited industrial competitiveness in the Middle East might have been the interaction
between economic segregation and human capital development. Some minorities were considered to be
predetermined for occupations in finance and trade in the Middle East; therefore, talented individuals of the majority
might have had fewer incentives to develop trade-related skills. This limited human capital development. An
important social factor in the economic development of Middle Eastern economies was the minorities of Greeks,
Armenians, Jews and Christian Arabs. They were active in the trade sector and played a role in finance, export-
oriented agriculture and the modest beginnings of modern industry. European merchants and colonial bureaucrats
cooperated with them and partly protected them because these minority members were often more interested in
learning foreign languages and developing technical skills.12 In Turkey, Greeks, Armenians and Jews were most
important. In particular, the Galata bankers dominated Turkish financial development during the early twentieth
century. Armenians and Greeks were also active in internal trade, industry, crafts and the professions. In Iran,
minorities played a smaller role, except for Jews, who were active in both Iranian industry and trade. In Egypt,
Copts held a remarkable share of the land, and they worked in the professions as well as government services. In
Lebanon, Christians began to dominate foreign trade and the silk industry beginning in the early nineteenth century.
This group also took over the traditional Jewish role in Syria in finance and industry. The importance of these
minorities was largest in the period at the beginning of the twentieth century. After that, the growing national
aspirations of the majorities had the effect of more and more majority members starting to cover positions
previously held by the minorities. However, the motivation of talented Arab, Iranian and Turkish majorities to invest
in trading skills developed late partly because the minorities had a low social reputation in their eyes and imitating
them was not desirable.

Living standards
Pamuk (2006) found that gross domestic product (GDP) development trended upward, but growth was relatively
slow in the Middle East. He estimated that GDP grew from only $611 per capita in 1820 (measured in constant 1990
dollars) to $1,023 in 1913, covering Turkey, Egypt, Arabia and Iran. As a percentage of the US/western Europe
national income value, this meant falling back from 49 to 25 per cent. The gulf region developed even more slowly
than did the core region of the Ottoman Empire, with Lebanon being the richest country in 1913.

Does this lag in production capacity imply that the overall standard of living was lower relative to Europe?
Ozmucur and Pamuk (2002) pointed to the fact that real wages were actually equal or greater in the large Middle
Eastern cities. As real wages reflect urban unskilled and skilled craftsmen’s welfare, it seems that the richer strata
such as merchants and professionals were lagging compared to Europe.

Another approach to analysing welfare is to look at human stature. This reflects health and nutritional quality,
which are important components of the standards of living of a population. This is especially informative in data-
scarce regions such as the Middle East and north Africa. For the Middle East, some recent estimates have been
based on anthropological measurements; a number of famous anthropologists travelled in the Middle East in the
eighteenth and nineteenth centuries, systematically measuring many individuals.13

The height measurements are organized by birth cohort, and a sufficient number of observations allows
assessment of the period from the mid-nineteenth century onward.14 Stegl and Baten (2009) choose a sample of
eight Middle Eastern countries where height data were available for the studied period (Figure 7.5). Turkey, Iraq,
Iran, Egypt, Syria, Lebanon, Palestine/Israel, Turkmenistan and Yemen are included. They compare the average
heights of these countries with a sample of central and southern European countries. Stegl and Baten showed that
people born between 1850 and 1870 in Middle Eastern countries enjoyed on average a favourable nutrition
compared to Europe. However, in 1880, the average heights of Middle Eastern people decreased suddenly. European
human stature began to exceed it, although with only a small difference for three generations. This difference
increased over time, reaching more than 7 centimetres (cm) for the generation born in 1980. Compared with the
world height average, the initial lead of the Middle East population vanished during the twentieth century (Figure

Figure 7.5 Height in Middle Eastern countries (male)

Source: modified from Stegl and Baten (2009). Turkmenistan added from

Figure 7.6 Height development in the Middle East and the world (male)
Note: see there for interpolation strategies (missing values have been interpolated to avoid artificial ‘jumps’
caused by data availability).

Source: based on Baten and Blum (2012).

There were also strong differences between regions within countries; these regional differences shed light on
the explanation of the height trend. In Iraq, for example, the average height differed between desert inhabitants and
the other inhabitants (both urban and rural). The desert Bedouins were on average 0.85 centimetres taller than were
other Iraqis. The reason behind this difference is the low population density in the desert, where people could benefit
from the meat and milk of the stock breeding in which the desert tribesmen engaged.

In Turkey during the late nineteenth century, Stegl and Baten (2009) find the shortest population in the western
coastal areas, which are now the richest regions in the country, while the tallest people lived in central Anatolia. A
likely explanation is again the low population density in central Anatolia. The population specialized on cattle
farming. For example, Issawi (1980) analysed tax returns and reported that animal husbandry was most important in
the relatively dry inland regions. In this central area, low population density and a partly nomadic lifestyle allowed
protein-rich nutrition.

Egypt is a dry country in general; the agriculture depends mainly on Nile water. Only in the northern coastal
region is the rainfall level slightly elevated. The inhabitants of this area had the advantage of obtaining enough rain
for their crops, and their height values were greater than were those of other Egyptian areas. The desert inhabitants
of Egypt also had a height advantage in comparison with the urban population. For neighbouring Libya, Danubio et
al. (2011) found that the heights of nomadic Tuareg born in the 1880s to 1900s were 3 cm greater than the heights of
other Libyans; on average, they were even 8 cm taller than were Libyan oasis inhabitants.

In general, between 1850 and 1870, the inhabitants of the Middle East showed a high average stature according
to nineteenth century standards (Figure 7.6). This good level first dropped in the 1880s. One potential immediate
cause of the 1880s height drop might have been the cattle disease, which originated in Asia in the 1880s and then
moved through the Middle East to the eastern part of Africa, which was severely hit in the 1890s.15 However, there
were additional underlying forces affecting the relative decline of Middle Eastern heights. During the nineteenth
century, parts of the Middle Eastern population still benefited from the so-called ‘proximity advantages’ to animal
husbandry. Bedouins and other inhabitants of the Middle East who lived close to goats, sheep and cattle could enjoy
more protein from milk and meat. Not only rich people could buy this; poor tribesmen also obtained their share,
especially of the less-popular parts of the animal. In contrast, Europe with its densely populated urban centres did
not have good access to protein sources during the mid-nineteenth century. In the twentieth century, the situation
changed. Even perishable foodstuffs such as milk could now be transported, thanks to refrigeration transport
technology. European inhabitants of large cities could provide their children with good nutrition, and urban
populations became taller than rural ones. Europe also made strong and early progress in public health and medical
development. Their GDP level was much higher than in the Middle East during the twentieth century; hence, they
could afford good nutrition and health during this later period.

Summing up, the interesting and slightly astonishing fact of this section was that during the mid-nineteenth
century, Middle Eastern populations did not necessarily suffer from poor nutrition, relative to Europeans. The
fascination of European travellers and writers for the inhabitants of deserts might have originated partly in the
special economic situation of nomads during this period. Also life expectancy slightly improved in Turkey from 27
to 31 years between 1820 and 1870 (Baten and Pamuk 2007). The strong relative decline during the twentieth

century might have stimulated perception of severe injustice among these tribesmen, who still trained themselves in
military activities.

The Middle East in the twentieth century
Issawi (1982) concluded that, for the period just before the First World War, almost all powerful positions in Middle
Eastern economies had been taken over by Europeans or minorities such as Armenians, Greeks, other Christian
minorities and Jews. He interprets the following century as an attempt to reverse this development. Europeans and
entrepreneurial minorities were forced or encouraged to leave, or sometimes killed (such as many Armenians in
Turkey). The two world wars that devastated Europe allowed the Middle Eastern reaction to abolish privileges (such
as immunities for European merchants) and to nationalize railways, banks, petrol stations and other utilities. The
ideology of the interwar and postwar years further promoted government-owned mining and industries. However,
even if nationalized industries might have been able to satisfy consumers with relatively simple products during the
mid-twentieth century, this way of organizing industries tends to be weak in the quality of goods produced, and in
the long run, new investments were missing. For example, countries such as Yemen lost their minority tradesmen
(who might have developed into entrepreneurs later on), and the relatively low status of human capital development
made it difficult to develop its own Yemenite entrepreneurial groups. Turkey was more successful in developing its
own entrepreneurs, given that the status of education had always been higher and the Ataturk reforms placed
particular emphasis on education. In addition, Turkey also benefited from the slightly more equal gender distribution
of education after the Ataturk reforms.

In Turkey during the time of Mustafa Kemal Ataturk in the first half of the twentieth century, many reforms
were initiated in different fields such as politics, economics and culture. Ataturk’s reforms can be summarized
mainly as abolishing the sultanate and afterwards the caliphate system in the country and converting the republic of
Turkey into a secular state. That is, Turkey, although having a Muslim majority, changed from being an Islamic
state to a laic country. Ghanem (2014) assessed whether separating the religion from the government had a positive
influence on human capital in Turkey. The results confirm that the secular state of Turkey led to a clear increase in
numeracy levels in the different Turkish regions. New schools were built and primary schooling became mandatory
and free. In addition, Ataturk replaced religious education with a national education system. Turkey did not change
to an atheist state; the freedom to worship and follow religions existed. However, the idea was to concentrate on
Islam in the mosques and religious places; what mattered at school was science and education (Ghanem 2014).

After the Middle East had deindustrialized during the nineteenth century, the situation started to change during
the twentieth century. Political movements in the Middle East not only demanded a political renaissance, but many
of its leaders also saw the need for reindustrialization (Issawi 1982). The two world wars also made clear that
European imports of industrial goods were not automatically available. The exceptional situation during the wars
also allowed experimentation with new production methods within the Middle Eastern countries, even if these were
not yet competitive.

Already before the First World War, some industries were growing again in Egypt and Turkey, for example.
Soon after the breakdown of the Ottoman Empire, Turkey started to develop more active industrial policies.
Indirectly inspired by the Soviet Union, Turkey decided to set up two five-year plans during the 1930s, making clear
that the state would play a strong role in this reindustrialization attempt. All Middle Eastern economies lacked
entrepreneurs. As suggested by the ideologies of the time, the state was expected to fill the gap. In addition, socialist

ideas were important in countries such as Syria, Iraq, Algeria, Afghanistan, Egypt and obviously central Asia, then a
part of the Soviet Union.

One different approach to industrial development was taken in Palestine and later Israel. The Sykes–Picot
Agreement in 1916 divided a part of the Middle Eastern region – which was previously part of the Ottoman Empire
– between England (Palestine, Iraq, Transjordan) and France (Syria, Lebanon). The former Ottoman territory of
Palestine became a British mandate in 1920. In 1922, the League of Nations decided that in this territory, a ‘national
home’ for Jews should be established, while still guaranteeing the civil and religious rights of all the inhabitants.
Following this political decision (and reinforced by anti-Semitism in Germany and other countries during the
interwar period), a strong immigration of Jews from different world regions resulted. Their population share rose
from 9 per cent in 1919 to 32 per cent in 1947. Many Jews brought skills and entrepreneurial traditions. Given that
the British Mandate aimed at restricting land purchases of previously Arab-owned land by Jewish immigrants, the
Jewish population group was initially more urban and had a higher share in industrial occupations than did the Arab
majority. This particular development in Palestine, which had terrible political and humanitarian consequences later
on, resulted economically in one of the few growth miracles of the region. In addition, the structure of firms was
determined much more by private entrepreneurs than by the government as in many other Middle Eastern

Why were twentieth century firms in other countries so often run by the government? Three main reasons come
to mind. We already mentioned above that entrepreneurial elites were often foreigners or minorities and that, in the
view of Arab, Iranian and Turkish politicians, the influence of both groups was to be reduced during the twentieth
century. The other two main reasons were the lack of human capital and skills and the peculiarities of oil production

We first discuss the skills and human capital levels during the twentieth century. Basic numeracy was generally
not very high during the nineteenth century and did not converge rapidly to neighbouring European levels (Figure
7.4). Only during the early twentieth century can a strong improvement be noticed. This deficit in the educational
component, numeracy, is equally visible in the other components of education, such as literacy. Issawi (1982: 113–
14) notes that literacy was only 7 per cent in Egypt in 1907, for example. The governments spent little public funds
on education. The 1860/61 Ottoman budget on education was only 0.2 per cent of total expenditure. In Algeria, it
was slightly higher at approximately 2 per cent (1890–1914). Even during the early twentieth century, the number of
school years was quite low (except in Israel, where it was substantially higher [Barro and Lee 2013]). The most
extreme was Yemen, where children received almost no schooling (Figure 7.7). In the Gulf States, the situation was
slightly better.

Figure 7.7 Years of schooling in Middle Eastern countries, by birth decade

Source: calculated from the Barro–Lee database ( but arranging all data by primary school
decade (i.e., the decade in which a cohort was approximately age 10). This assumes no strong survivor-bias

distortion and no strong adults schooling (See Baten and Ghanem 2014).

Similar statements could be made about secondary and tertiary schooling. Such a low level of numeracy and
school education made it very difficult to develop a class of entrepreneurs because this type of occupation requires
substantial abilities to work with numbers. The function of entrepreneurs was, therefore, taken over by the state.

Another reason was the amount of oil revenues. If the Middle Eastern economies reinvested the government
share of oil income, they often did this in the form of state-owned companies. In 1908, oil was discovered in the
Middle East. This discovery completely changed the landscape of its economies. Oil had always been used in small
amounts, for example, in the form of seepage for rubbing of camel sores. In two places in Iraq, crude oil was already
extracted in the 1870s with quite primitive methods. However, real development started in the 1900s. The Iranian
government decided to give a concession to a British company. Other countries also gave concessions to European
and American firms, ultimately resulting in an oligopoly structure of less than ten large oil-mining firms that has
persisted until today with varying actors. In Iran, the British monopoly concession was soon debated with great
dissatisfaction among the Iranian population. However, Reza Shah again signed in 1933 an unpopular agreement
under British pressure. The question about the nationalization of its oil reserves became one of the key issues in the
social and political conflicts in Iran during the 1940s and 1950s.

During the pre-Second World War period, most oil extraction took place in Iran and on a much smaller scale in
Egypt. Only during the 1940s did Iraq also become a major exporter. To a much smaller extent, Bahrain and other
Middle Eastern countries also increased exports. Up to 1940, Middle Eastern and north African oil production was
still below 5 per cent of world production. However, it then exploded to 26 per cent in 1960, reaching a maximum of
42 per cent in 1975. Initially, the Middle Eastern countries did not receive much of this new wealth. However,
between 1950 and 1975, direct payments from the petroleum companies to the governments rose from $240 million
to $81 billion (and to $163 billion in 1979). The renegotiation of contracts with the petroleum companies and the
formation of the Organization of Petroleum Exporting Countries (OPEC) in 1960 resulted in dramatic change.
OPEC’s cartel policy during the Arab–Israel conflict of 1973 and later in the 1970s generated a flood of revenues for
the oil states Iran, Iraq, Kuwait, Saudi Arabia, Qatar, United Arab Emirates, Egypt, Libya, Algeria, Bahrain and
Oman (Oman, and also Syria, Israel and Turkey had quite small revenues).

What was the effect of oil production on the economies? Issawi (1982: 207) concludes after carefully weighing
many pros and cons that the initial period of the 1950s and 1960s was quite beneficial. In particular, some of the
least-developed countries receiving oil revenues served as a stimulus for their economies. In general, only a small
part of the population worked in oil production (normally less than 2 per cent), but in the Gulf States, it could be up
to one-half. Many persons who left oil companies also created their own firms. Training on the job allowed
developing the necessary entrepreneurial skills and the ‘spirit’.

However, the 1970s oil price increase and production expansion brought an enormous amount of wealth that
resulted in mixed blessings for at least three reasons: (1) Some of the classical ‘curse of resources’ phenomena
occurred. Issawi (1982) speculated that it was difficult for the Middle Eastern people to find agreement on how to
distribute the wealth, partly because it was subjectively not ‘earned’ by the individual population groups in the oil

countries.16 (2) In addition, the view that ‘anything could be imported’ was shared by many Arabs and Iranians,
which was poison for reindustrialization efforts. (3) The high expectations of income generated by the seemingly
inexhaustible stream of revenues became unrealistic. Rising inequality between those who benefited and those who
perceived themselves as losers created so much dissatisfaction that it could even lead to civil war as in the case of
Algeria, or at least extremist political attitudes in other countries.

What could the government do about all this? The only feasible strategy was to try to reinvest much of the oil
revenues into firms that would generate income after oil income ended. The owner of those firms was often the state.
A major problem was, however, that the state-owned firms tended to be highly inefficient. A government bureaucrat
was not necessarily the ideal person to maximize productivity and to reduce costs. When problems of
competitiveness appeared, managers demanded import protectionism and monopolies, rather than improving the
production side and looking for new markets and new technologies. Only in recent decades have these issues been
partly improved and structural reforms initiated. However, perceived injustice in some of the countries was already
widespread. In addition, possibilities for democratic participation and improving the situation were limited, which
reinforced dissatisfaction. Finally, some of the industrial countries performed interventions to secure oil resources
for themselves in recent decades. All these factors resulted in a series of wars and internal conflicts that have had
terrible consequences for the Middle East until even today.

To what degree are these developments of the twentieth century reflected in GDP trends and living standards
(Figure 7.8)? If we consider the development of GDP per capita in the Middle East between the 1950s and today, we
can rely on some informative statistics which are of course not beyond doubt, especially not for the early periods.
Some of the governments also had a strong preference for window-dressing of indicator variables. However, in
general, we can gain some insight from looking at GDP as an indicator of productive capacity. Given that we have a
large number of countries in the Middle East, we reduced the set of the countries we examine in detail to thirteen
because, for example, some of the Gulf countries such as the United Arab Emirates, Kuwait and Bahrain developed
similarly to Qatar.

Figure 7.8 GDP per capita in selected countries of the Middle East
Note: the y axes have different scales.

If we look first at the six countries which represent the centre and the north (Lebanon, Turkey, Israel, Iran,
Afghanistan and Iraq), we see that Israel had a relatively favourable development. Given the relatively good
educational status of the Israeli population, this is not astonishing – even though the country did not benefit from oil
resources. This is quite different in the cases of Iran and Iraq, both of which had a substantial GDP increase from the
1950s to the 1970s. The oil price explosion and expansion of oil production was clearly a driver here. Especially
during the early 1970s, oil prices were at an enormously high level. Later on, Iran had some modest decline during
the intensive war of 1980–88 with Iraq. In Iraq, in contrast, we have a substantial decline of GDP per capita in the
1990s following the Kuwait crises and the two Gulf wars with the US. GDP in Iraq has most likely experienced the
strongest decline of any of the larger countries of the Middle East. The poorest country in this region is Afghanistan,
which always had a very low development level; also, the country’s educational values were usually quite low.
Interestingly, the second highest level of GDP was initially reached by Lebanon. Despite not having oil reserves,
Lebanon, as the banking centre of the Middle East and one of the trading centres, had a high national income in the

Moving to the Arabian and Gulf economies, we see again a strong difference in the early period between
countries with and without oil. For example, Yemen was very poor, whereas the small oil economies in the Gulf like
Qatar started with a quite high GDP per capita. The small population of Qatar combined with very large oil reserves
resulted in an enormously high GDP per capita. Saudi Arabia and Oman benefited from the oil increase. In the
1990s to 2010s period, the three richer countries of this world region had relatively similar GDP values. Finally, we
consider three countries of the north African area.17 We see that Libya shared the strong increase in oil revenues
between the 1950s and 1970s. When oil was not a driving force anymore, Libya experienced a decline in GDP per
capita up to the 1990s and stagnated since then. There was a gradual increase in Egypt and Algeria. Even during the
period of the Algerian civil war (1991–2001), the GDP level did not plummet catastrophically because it was offset
by other factors.

Because GDP per capita is strongly dependent on oil revenues and availability, it is important to consider life
expectancy as an additional welfare indicator for this period (Figure 7.9). If we compare trends in life expectancy for
the same countries, we first observe a steady increase in all the countries, which is mainly driven by worldwide
medical progress. Everywhere in the world, we had a strong increase in life expectancy during this period. However,
looking a bit more closely, we see some interesting differences in life expectancy. First, slightly different from GDP
development, Lebanon develops much better. It starts again at the second highest level directly behind Israel, but in
contrast to GDP developments, it stays at a high level, even during the civil wars of the later twentieth century
(1975–76, and sporadically thereafter).

Figure 7.9 Life expectancies in selected countries of the Middle East


The other countries typically developed from values between 35 and 45 years of life expectancy in the 1950s to
values of approximately 65 in the 2000s, but some countries deviate from this pattern. The most obvious deviation is
Afghanistan, which started at a very low level of approximately 27 years of life expectancy. During its history of
civil war and underdevelopment, there was only very modest progress in Afghanistan. Modern technology was not
able to diffuse in this country; even in the 2000s, we still only have values of approximately 45 years of life
expectancy. In contrast, in Iran, which started even slightly lower than Afghanistan according to these estimates, we
see substantial progress in the 1950s to 1970s. Even during the Iran–Iraq war, which many observers compared to
the First World War in terms of violence and number of victims, Iran and Iraq did not experience a decrease in life
expectancy.18 In Iran, parallel developments of improving health and nutrition most likely counter-balanced the war
effects, although the value of 65 is slightly below what most other Middle Eastern countries achieved during this
period. In the Gulf region, Qatar was always slightly ahead of Oman and Saudi Arabia. Unfortunately, we do not
have estimates for Yemen during this period. In north Africa, we see a somewhat parallel development in the three
countries under study up to the 1970s, after which Egypt had slightly less progress.

The economic history of the Middle East, north Africa and central Asia offers a great amount of variety. Although
urban cultures may have lost the world-leading role they had in the high Middle Ages, the urban centres of the
region continue to be highly important. Istanbul was the largest city in Europe from around 1600 until 1750. At the
other extreme, nomadic economies of the deserts and half deserts display some surprising characteristics. For
example, nutritional status was substantially higher in the Middle East than in Europe during the mid-nineteenth
century. This can be partly explained by the good access of nomadic people to protein. Only after the cattle plague
period of the 1880s and 1890s did health and nutrition development become worse than in Europe. During the
nineteenth century, the Middle East became the object of colonialist influences from western European powers after
the Ottoman Empire gradually decreased in influence and became the ‘sick man of Europe’. In the north-east of the
Islamic world, the Russian Empire expanded to include the previous Khanates of Bukhara, Fergana and other
Islamic central Asian territories. Cash-crop economies developed, such as cotton in Egypt and what is today

During the twentieth century, the first substantial oil revenues were earned in Iran and other countries. The
economic history of the Middle East, north Africa and central Asia was also a struggle with the ‘curse of resources’
both during the nineteenth and the twentieth centuries. Pamuk and Williamson (2010) demonstrated that, ironically,
favourable development of export prices for Middle Eastern cash crops (such as cotton) lured the region into
deindustrialization. Positive price signals had negative long-run consequences.

Another reason why Middle Eastern economies found it difficult to compete with European industrial goods
was that human capital and skills to compete with European producers were lacking. The Ottoman Empire had
invested almost no public funds in schooling during the mid-nineteenth century; nor did families or religious schools
teach abilities useful for industrial development. In addition, low governmental abilities to tax were a factor, as well
as institutional developments that interacted with traditional laws and rules of the world region.

The ‘curse of resources’, of oil in particular, also had the effect that many revenues were reinvested in state-
owned firms that became inefficient burdens on the economies. A number of studies have discussed whether oil and
other natural resources often result in specific types of political economies in which small groups obtain great wealth
while a large part of the population considers their share of income and political participation to be insufficient.


1. The main indicator is human stature (see below). The term was first used by Komlos; see the Introduction in
this volume.

2. See Larguèche (2001).

3. See on the following Owen (1993), Mokyr (2003) and Issawi (1982). Grain was certainly the most important
agricultural product. Additional crops included flax, tobacco and opium. The famous Nile inundations helped
achieve relatively respectable grain productivity. The other irrigation economy of Mesopotamia (today’s Iraq) was
also mainly oriented toward grains. However, the rivers were slightly more difficult to handle in Iraq. In
particular, they delivered floods in the ‘wrong’ month, in April and May. This was too late to irrigate the winter
crop. However, it could destroy unprotected fields. In addition, the Tigris and Euphrates rivers flooded very
quickly in spring, coming from the northern mountains, sometimes causing rivers to move permanently to new
channels. In addition to the mentioned grains, large numbers of dates were grown in the south of Mesopotamia
around Basra.

4. There were even special towers without doors and windows in Mesopotamia. Some of the peasants also aimed
at creating temporary alliances with nomads in order to prevent tax collectors from taxing a large part of their

5. During the nineteenth century, the situation of property rights gradually improved, but now population growth
was rapid and the imperial interests of Britain and Russia became a challenge for Iran. Although Britain gained
considerable influence and Iranian merchants felt that their natural resources were expropriated, Iran never
became a formal colony. The Russian Empire was more successful in neighbouring Azerbaijan, which later in the
nineteenth century provided substantial oil revenues. Russia also expanded into the steppe of modern Kazakhstan
and the ‘silk road’ area of central Asia.

6. Well-known were muslins from Mosul and damask from Damascus, for example.

7. The wealth of Arabia consisted traditionally mostly of its goats and sheep. Also famous were the horses and
camels. Oman developed a significant trading position with up to 2,000 ships moving between India and southern
Africa in the early nineteenth century. Some mines for copper and lead existed. Yemen specialized in the
production of coffee. This country was politically heavily contested and suffered from several conflicts.

8. Population growth was stimulated by these reforms, as more land was now put to use. Another strong
determinant of population growth was the fact that the plague disappeared during the early nineteenth century.

9. Even if migrant selectivity might have been positive, the effect could not be very large.

10. This was a substantial relative decline of human capital during and after colonization. In the later Kyrgyzstan
region, development was similar (but from a lower initial value), whereas Turkmenistan had a surprisingly low
level during the 1830s and 1840s.

11. We would argue that this is the case if no exogenous motivation for human capital investment exists.
However, the cases of Denmark, New Zealand and the early history of the US suggest otherwise; skill-intensive

agriculture certainly was an option to develop high income even before later industrialization took place in some
of these countries.

12. In addition, the Tanzimat reforms from the 1830s removed many of the constraints under which the minorities
(‘millets’) had been suffering for centuries. They also received support from people of the same religion who
lived in Europe and America.

13. The advantage of these samples is that there is no social selectivity in height measurement, although there
could be a regional selectivity issue. Stegl and Baten (2009) already accounted for this potential distortion; it
seems not to play a large role.

14. All heights are organized by birth cohort, because the strongest influence on final adult stature occurs during
the years after birth.

15. In Iran, the decrease happened in 1880 as well. Gilbar (1986) assumes that, in Iran, the boom of crops
agriculture such as cotton, opium and grain encouraged people to pay more attention to planting these crops and
pushed them away from animal farming.

16. In contrast to industry, for example, where profits went to entrepreneurs and wages to workers.

17. Again we omit Tunisia and Morocco because their development was quite similar to that of Algeria.

18. We assume that there is not misreporting.

Further reading

Coşgel, M. and Ergene, B. A. (2012), ‘Inequality of Wealth in the Ottoman Empire: War, Weather, and Long-term
Trends in Eighteenth-century Kastamonu’, Journal of Economic History 72 (2, June), 308–31. Gives a nice snapshot
of evidence on inequality.

Issawi, C. (1980), The Economic History of Turkey, University of Chicago Press. Rich in details and written

Issawi, C. (1982), An Economic History of the Middle East and North Africa, New York: Columbia University
Press. An accessible and comprehensive economic history of the Middle East.

Kuran, T. (2011), The Long Divergence: How Islamic Law Held Back the Middle East, Princeton University Press.
A provocative hypothesis about why the Middle East fell back.

Owen, R. (1993), The Middle East in the World Economy 1800–1914, London/New York: I. B. Tauris. The trade
structure is explained well.

Pamuk, S. (2010), The Ottoman Empire and European Capitalism, 1820–1913: Trade, Investment and Production,
Cambridge University Press. Pamuk is the pioneer of quantitative economic history of the Middle East.

Pamuk, S. and Williamson, J. G. (2010), ‘Ottoman De-industrialization, 1800–1913: Assessing the Magnitude,
Impact, and Response’, The Economic History Review 64 (S1), 159–84. They explain why the rising term of trade
lured the Middle East into deindustrialization.

Stegl, M. and Baten, J. (2009), ‘Tall and Shrinking Muslims, Short and Growing Europeans: an Anthropometric
History of the Middle East, 1840–2007’, Exploration in Economic History 46, 132–48. The surprising finding of
relative high anthropometric welfare around mid-nineteenth century is plausible due to the comparison with
similarly high real wages.


Barro, R. J. and Lee, J. W. (2013), Data set:, last accessed 15 August 2014.

Baten, J. and Blum, M. (2012), ‘Growing Tall but Unequal: New Findings and New Background Evidence on
Anthropometric Welfare in 156 Countries, 1810–1989’, Economic History of Developing Regions 27 (1), 66–85.

Baten, J. and Ghanem, R. (2014), ‘Towards a Human Capital History of the Middle East and South Asia 1850–
1950’, Working Paper, University of Tuebingen.

Baten, J. and Pamuk, S. (2007), ‘Inequality in Standards of Living across Europe, 1820–2000: a Preliminary Look’,
presented at the workshop on Human Capital, Inequality and Living Standards, Measuring Divergence and
Convergence in a Globalising Europe, Lund.

Borsch, S. J. (2005), The Black Death in Egypt and England, Austin, TX: University of Texas Press.

Bosker, M., Buringh, E. and van Zanden, J. L. (2013), ‘From Baghdad to London: Unraveling Urban Development
in Europe, the Middle East, and North Africa, 800–1800’, Review of Economics and Statistics 95 (4), 1418–37.

Danubio, M. E., Domenico Martorella, F., Rufo, E. V. and Sanna, E. (2011), ‘Morphometric Distances Among Five
Ethnic Groups and Evaluation of the Secular Trend in Historical Libya’, Journal of Anthropological Sciences 89,

Deutsches Staats-Wörterbuch, Bluntschli, J. C. (ed.) (1857), Stuttgart and Leipzig: Giesecke and Devrient.

Findlay, R. and O’Rourke, K. (2007), Power and Plenty. Trade, War and the World Economy in the Second
Millennium, Princeton University Press.

Ghanem, R. (2014), ‘Human Capital Development in the Middle East: Is Secularism a Solution? Evidence from
Turkey in the Nineteenth and Twentieth Century’, Working Paper, University of Tuebingen.

Gilbar, G. G. (1986), ‘The Opening up of Qajar Iran: Some Economic and Social Aspects’, Bulletin of the School of
Oriental and African Studies 49, 76–89.

Juif, D. and Baten, J. (2013), ‘A Story of Large Land-owners and Math Skills: Inequality and Human Capital
Formation in Long-run Development, 1820–2000’, Journal of Comparative Economics 42 (2), 375–401.

Larguèche, A. (2001), ‘The City and the Sea: Evolving Forms of Mediterranean Cosmopolitanism in Tunis, 1700–
1881’, in J. Clancy-Smith (ed.), North Africa, Islam and the Mediterranean World: from the Almoravids to the
Algerian War, London: Frank Cass, 117–28.

Mokyr, J. (2003) (ed.), The Oxford Encyclopedia of Economic History, Oxford University Press.

Owen, R. (1993), The Middle East in the World Economy 1800–1914, London/New York: I. B. Tauris.

Ozmucur, S. and Pamuk, S. (2002), ‘Real Wages and Standards of Living in the Ottoman Empire, 1489–1914’, The
Journal of Economic History 62 (2), 293–321.

Pamuk, S. (2006), ‘Estimating Economic Growth in the Middle East since 1820’, Journal of Economic History 66,

Prayon, V. and Baten, J. (2013), ‘Human Capital, Institutions, Settler Mortality, and Economic Growth in Africa,
Asia and the Americas’, Working Paper, University of Tuebingen.

Rubin, J. (2011), ‘Institutions, the Rise of Commerce and the Persistence of Laws: Interest Restrictions in Islam and
Christianity’, The Economic Journal 121 (December), 1310–39.


Women in global economic history

Sarah Carmichael, Selin Dilli and Auke Rijpma

The existing social relations between the two sexes – the legal subordination of one sex to the other – is wrong
itself, and now one of the chief hindrances to human improvement.

John Stuart Mill, The Subjection of Women, 1869

The unequal treatment of women is not only intrinsically problematic, but also detrimental to society. Research
shows widespread negative effects of an unequal position for women, including being detrimental to children’s
educational attainment and economic growth (Carmichael et al. 2014). Improving gender equality, therefore, plays
an important role in the development process. The comparative study of gender equality, particularly from a
historical perspective, is key to understanding current-day gender and development outcomes. For instance, in the
Middle East and North Africa (MENA), a woman at the age of 30 is likely to be healthier and more educated than
her mother, having benefited from massive investments in the education and health sectors in recent decades.
However, she is likely to face greater obstacles in finding a job and playing an active public role in her society than
her contemporaries face elsewhere in the world (World Bank 2004: xiv). The MENA region also features unequal
inheritance rights of women and has the lowest percentage of female parliamentarians in the world (Carmichael et
al. 2014). Economic development alone does not seem to sufficiently explain gender inequalities. After accounting
for national differences in income, women in the Islamic world are still socially and politically disadvantaged
relative to men (Fish 2002; Coffé and Dilli 2014).

A handful of cross-national studies take the historical position of women into account.1 Alesina et al. (2013),
for example, show that societies that traditionally practised plough agriculture have less gender equality today.
Similarly, Dilli et al. (2015) conclude that the institutional arrangement of countries, particularly in terms of
historical institutions, is as important as economic development in determining gender equality outcomes. With
gender inequalities today the result of historical processes, a historical perspective on the issue is required.

One of the first issues in understanding gender equality is how to capture such a multifaceted concept. Women
can be discriminated against in diverse ways, for instance prohibitions on working outside the house, unequal pay,
gender-based violence and forced child marriages. Capturing women’s position in society thus requires multiple
indicators. To create a summary picture of the position of women within a given society, six of these are combined
into a composite index by calculating a weighted average of each indicator as a ratio of female to male achievements
(Figure I7.1, details in Dilli et al. forthcoming). This historical gender equality index shows that progress on a world

scale has taken place. However, the gap between high and low performers remains. South and Southeast Asia

(SSEA), along with the MENA region are still at the bottom of the pack.

Figure I7.1 Regional averages of the historical gender equality index (HGEI), 1950s–2000s
Note: scaled 100=equality, >100 female advantage.


Figure I7.2 The average man and woman in 1900, 1950 and 2000

Turning to the underlying components of the index, the next section illustrates the development of marriage
ages of women, sex ratios and the percentage of women in parliament for countries and regions across the world
over the course of the twentieth century.

Marriage ages
Marriage ages of women can be used as an indicator of the position of women in society. Hajnal (1965) first
suggested a distinct historical difference between marriage ages in western Europe and the rest of the world and
linked this to the possibility for women to work in service before marrying. He proposed a division between east and
west along a line from St Petersburg to Trieste. Marriage ages to the west of this line were traditionally higher, with
women marrying above the age of 24 and closer in age to their spouses, while Eastern Europe displayed lower ages
of marriage, and yet further east marriage ages of Asian women indicated the prevalence of child marriages. De
Moor and van Zanden (2010) argue, using evidence from early modern Europe, that women’s age at marriage
influenced economic development, partly because women marrying at higher ages had more opportunities to acquire
human capital. Recent scholarship has demonstrated that the line Hajnal proposed is too stark, showing a continuum
with a shift towards lower ages from Poland’s western to southern border (Szołtysek 2012).

On average, across the world, marriage ages of women have been rising (Figure I7.3). However countries such
as China, Mexico, Russia and Egypt have shown a smaller increase in this measure of female empowerment than,
say, Japan. India’s low ages at marriage are particularly striking (see Gupta 2014). The changes over time in the
marriage ages of the UK and the Netherlands both show a similar dip after the Second World War, concomitant with
the ‘baby boom’ and the golden age of the housewife when women retreated into the household.

Figure I7.3 Singulate mean age at marriage (smam) in selected countries and world average, 1900s–2000s


Sex ratios
Sen (1992) observed that globally there are 100 million women less than the natural ratio at birth (1.05) and survival
rates in countries without excess female mortality would suggest. Sen linked this to traditional culture and values, as
well as the economic status of women. Work by McNay et al. (2005) showed that for nineteenth-century England
and Wales excess female mortality varied regionally and depended on demographic conditions and what
employment opportunities were open to women.

Here, the so-called ‘sex ratio’ is calculated as the ratio of girls to boys aged 0–5 to capture discrimination
against female infants and sex-selective abortion (Carmichael et al. 2014). China and India are among the countries
with the most biased sex ratios today – huge countries that impact the global trend. Strikingly, both countries have
seen a recent worsening of sex ratios from normal levels in the 1950s (India) and the 1970s (China). This is due to
the combination of cultural preferences for boys and, in China, the one-child policy, combined with ultrasound
technology enabling sex-selective abortion (Klasen and Wink 2003). This example shows that there is not always
linear progress towards gender equality.

Political representation
Although significant progress has been made regarding the political rights of women in the last two centuries,
women are still underrepresented in the political decision making processes (Figure I7.4). In 1907, Finland became
the first country in world history to elect a woman to parliament. More than a century later, women hold 22.3 per
cent of parliamentary seats globally. Countries display very different patterns of growth and decline over time. Sri
Lanka has always had less than 5 per cent female parliamentarians whereas older democracies, such as Denmark,
Sweden and Norway show steady increases in female representation, reaching 30 per cent in the 2000s (Paxton et al.
2010). While it took them almost 100 years to reach this threshold, countries like Rwanda and South Africa
introduced gender quotas to hasten women’s political representation, thereby quickly reaching Scandinavian levels
(Dahlerup and Leyenaar 2013). The removal of such quota systems can also have consequences, as is the case in the
countries of the former USSR. Once near the top in the world rankings of female representation, the fall of the
Berlin Wall brought the removal of the quota system and now most countries of the region rank far behind northern
Europe and many developing countries (Saxonberg 2000).

Figure I7.4 Ratio of female to male parliamentarians in selected countries and world average, 1900s–2000s


Explanations of the causes of gender equality can be grouped into two strands. The first, modernization theory,
attributes gender disparities to countries’ levels of development, arguing that as countries become more
economically developed, democratic and educated, women can improve their bargaining position (Inglehart and
Norris 2003). However this link is not straightforward. Boserup (1970) was among the first to argue that some
stages of industrialization worsen gender equality. Goldin (1995) showed women’s labour force participation to be
U-shaped: declining in the first stage of development, but improving later. Moreover, looking at the low level of
parliamentary participation of women in many western European countries, worsening sex ratios in China, or the

limited labour force participation of women in the MENA, casts doubt on whether development always translates
into gender equality. A second strand of literature therefore focuses on the long-term norms and values as the (deep)
causes of the persistent gender inequalities. Family structures, legal traditions, religion and agricultural practices
have all been shown to have long-term effects on current gender equality outcomes (Dilli et al. 2015, Alesina et al.

It is clear that the position of women has improved since 1900. However, substantial differences remain
between regions and countries. Moreover, there has not been much catch-up in gender equality and no country in the
world has achieved absolute equality between the sexes. This suggests that improving women’s position in society is
an area where work remains to be done. Understanding the historical roots of gender inequalities is an important step


1. For a full overview by region, see www.wiwi.uni-


Alesina, A., Giuliano, P. and Nunn, N. (2013), ‘On the Origins of Gender Roles: Women and the Plough’, Quarterly
Journal of Economics 128: 469–530.

Boserup, E. (1970), Woman’s Role in Economic Development, London: George Allen and Unwin Ltd.

Carmichael, S., Dilli, S. and Rijpma, A. (2014), ‘Gender Inequality’, in J. L. van Zanden, J. Baten, M. Mira
d’Ercole, A. Rijpma, C. Smith and M. Timmer (eds.), How was Life: Global Well-being Since 1820, Paris: OECD.

Coffé, H. and Dilli, S. (2014), ‘The Gender Gap in Political Participation in Muslim-Majority Countries’,
International Political Science Review.

Dahlerup, D. and Leyenaar, M. (2013), ‘The Move towards Gender Balance in Politics – in Old and New
Democracies’, paper to the 3rd European Conference on Politics and Gender, Barcelona.

De Moor, T. and van Zanden, J. L. (2010), ‘Girl Power: the European Marriage Pattern and Labour Markets in the
North Sea Region in the Late Medieval and Early Modern Period’, Economic History Review 63 (1).

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Legacies’, CESifo Economic Studies 61: 301–34.

Dilli, S., Rijpma, A. and Carmichael. S. G. (forthcoming), ‘Gender Equality in a Historical Perspective: Introducing
the Historical Gender Equality Index’, GCEH Working Paper Series.

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Imperial expansion of the Ottoman Empire and its
cultural determinants

Rima Ghanem and Joerg Baten

The reasons behind the geographical expansion of the Ottoman Empire have been studied in recent research from a
new perspective. Iyigun (2013) analyzed the directions of imperial expansion based on the cultural influences of the
Ottoman ruler’s family. While male lineage was mostly predetermined, the Sultan mother was typically a former
slave, often a convert who was born in Europe. Because the Sultan’s mother educated the prince, she provided her
son with some cultural preferences that influenced the direction of territorial expansion. For example, fifteenth-
century mothers were of Turkish origin, with only one female slave from Albania in between. The ethnic
backgrounds of the Sultan’s mothers during the sixteenth century were different, as one Polish and two Italian
women became concubines and later prince’s mothers.1 During the eighteenth century, the pirates of the western
Mediterranean provided French female slaves (as well as Italians and women from the Balkans); some of these later
became Sultan’s mothers. Iyigun (2013) argues that this composition influenced the direction of territorial
expansion, specifically the shift away from Christian target territories between the fifteenth and sixteenth centuries
towards the regions of the east, and back again during the seventeenth century.


1. In the seventeenth century, many Serbian women also entered the Harem and became Sultans’ mothers, in
addition to one Russian and one Greek. However, during this century, there were also Bosnians and one Albanian
who might have come from Muslim families.


Iyigun, M. F. (2013), ‘Lessons from the Ottoman Harem on Culture, Religion and Wars’, Economic Development
and Cultural Change 61 (4), 693–730.


South Asia

Tirthankar Roy

The region now known as South Asia consists of five large nations – India, Pakistan, Bangladesh, Nepal and Sri
Lanka, and several smaller nations. Most debates and controversies in the economic history of South Asia usually
relate to the area and population under India, Pakistan and Bangladesh, which together formed a large part of the
territory of the British Indian Empire between 1858 and 1947.1

This area is geographically very diverse, containing the Himalayan mountains in the north, the huge fertile
floodplains of the two great Himalayan river systems, the Indus and the Ganges, the world’s largest delta, a long
coastline, arid uplands, tropical dry forests and savannah and the Thar desert in the west. It is also socially very
mixed, consisting of many language groups, almost all religions of the world and social practices in one region that
are vastly different from those in another. Politically, too, the region was never united. The densely populated
floodplains and deltas were territories where several large empires formed and disintegrated from before the
Christian Era. These empires lived mainly on land taxes. The seaboard and the arid zones, on the other hand, were
controlled by smaller and poorer states, usually more dependent on trade. A loose integration of these worlds was
achieved during the reign of the great Mughal emperors (1526–1707), but it did not last. The empire fell apart in the
early eighteenth century, giving rise to a cluster of semi-independent successor states.

With its geography and history being as varied as just described it is surprising that the economic history of
South Asia should exist as a coherent discourse at all. The reason that it does has to do with the trajectory that
unfolded after the fall of the Mughal Empire. Two developments imparted a certain unity in the pattern of economic
change thereafter. First, the British Empire in South Asia, which rose to power between the mid-eighteenth century
and the mid-nineteenth, achieved a degree of political, bureaucratic and military centralization that the region had
not seen before. The process of centralization built upon a different system of taxation and, in turn, a different
relationship between the state and the elites from before. The current political boundaries of the three nations, as
well as persistent problems of achieving a peaceful federal setup in all of them, are both to some extent a result of
the way the Empire had forced a union in an otherwise diverse land.

Second, thanks to its prehistory as a trading zone and later the colonial status, colonial India experienced a deep
economic integration with the world. Trade, investment and migration rose to higher levels than before. Curiously,
the market integration produced paradoxical effects. Colonial India was the only tropical country to have
industrialized in the nineteenth century on a truly large scale; employment in factories increased from less than
100,000 in 1860 to two million in 1940. The rise of factory industry owed something to the many-sided links India
forged with Britain. On the other hand, South Asia lost a part of its rich craft heritage, and its major livelihood,

agriculture, continued to generate small average income, subsistence wages, poor yield and overall gained little from

growing export crops for the world market.
The paradox of modernization amid persistent poverty is the origin of many debates in the economic history of

South Asia. It will naturally occupy a large part of the present survey too. In order to manage a large scholarship
contributed by specialists on many branches of history, I will concentrate on only one segment of it, the one that has
handled quantitative data. To this paradox, a new theme has been added in the last ten years. This is the divergence
debate of the 2000s. Whereas older discourses on the origin of international economic inequality tended to focus on
Europe, the divergence debate foregrounded Asia, Africa and Latin America. Inspired by the new positioning of
Asia, and the quantitative nature of the discussion, scholars specializing in India have constructed new estimates of
levels of living in the region. The result has been a firmer integration of South Asian history with world history. This
second theme will also form a part of the present survey.

The chapter consists of four sections. The next section presents a very brief outline of the major
historiographical debates on precolonial and colonial South Asia. The section that follows summarizes the literature
assessing the impact of the Empire. The third section focuses on the living standard research in the context of
modern debates on inequality. The fourth and the final section deals with postcolonial India, and presents a survey
as well as an interpretation of continuity and change between the colonial and the postcolonial times.

A quick tour through the big questions
That the power of the ancient and medieval Empires flowed from control over land is almost an axiom in the
literature on precolonial South Asia. The most powerful of these had formed, or tried to control the lands at the
intersection of the Indus and Ganges floodplains. This was a strategically important territory being at the crossroads
of routes out of South Asia into the territories held by powerful states and military tribes in central Asia,
Afghanistan and Iran. It was also near enough to the highly fertile agricultural tracts along the Ganges. The two
rivers, especially the Ganges, provided access to the northern deltas and the Indian Ocean. Large towns formed in
these geographical zones. The most famous of these sites were also the capitals of powerful states.

How did property right in land and military privilege combine to maintain such power? Why did such
arrangements begin, last a long time and disintegrate? How did politics affect the merchants and artisans? The
pioneering work of William Moreland, D. D. Kosambi and, later, interpretive works by the feudalism school led by
R. S. Sharma, and the Aligarh historians led by Irfan Habib, address some of these questions with different
material.2 One proposition that finds a great deal of favour now is that these Empires relied on a decentralized
system of tax collection and military service. By implication, they were vulnerable to simultaneous outbursts of
rebellion by many local agents. Parallel to this set of works interested in the relationship between the land and the
state, another set looks at the thriving commercial world of the seaboard. Here Indian and Arab merchants, and from
around 1600 Europeans, took part in the Indian Ocean trade in textiles, spices, horses, silks and other commodities
(see Map 8.1 showing the centres of South Asian industrial production).3 The relationship between the maritime
world and the land-based world of the interior, however, remains an unsettled issue.

Map 8.1 Trade and manufacturing in South Asia under the Mughals in the sixteenth century

Source: see map 1.1.

One of the post-Mughal successor states was Bengal where effective political and military power was
transferred from the old regime to the British East India Company around 1757–65. Between 1765 and 1818, the

Company acquired new territories in western, southern and northern India. These territories passed on to the British
Crown in 1858. The link between the land and the sea becomes a major problem in explaining the rise of the
Company. The great land-based empires of earlier times – the Mughals and the Sultanates near Delhi, Satavahana or
Vijayanagar in the peninsular, the Gupta of central India, the Maurya in the east – had only tenuous control upon the
seaboard. The Company was not land-based, it was a merchant firm located on the hitherto politically marginal
seaboard. And yet, it formed the most powerful Empire the region had seen. Why did such a dramatic turn happen?
Surely, a proximate cause of its success was a standing army maintained from central treasury, and a suppression or
marginalization of feudal elements of support. But how much did that revolutionary step owe to the Company’s
foreign origin, commercial origin or pure chance? What role, if any, did the Company’s own internal organization
play in its transformation from a multinational trading firm to a territorial state?

Questions like these animate the economic history of ‘early modern’ India. The core of the discipline, however,
is engaged with ‘modern’ India, or the era of the British Empire, and the long-term legacy that colonialism left upon
the modern nations of South Asia. These years saw a number of momentous changes. India’s status as a trading
partner of Britain changed in this time from an exporter of artisanal textiles to an exporter of agricultural
commodities and consumer of British textiles, aided by the railways, steamships and the telegraph. The abolition of
slavery encouraged New World plantations to organize the import of South Asian labour. The Empire was readier
than any previous regime to set up laws governing commercial, financial and labour transactions. From the time of
the Mughal collapse, Indian capitalists migrated from the interior world to the port cities established in the
seventeenth century by the Company, giving rise to a new cosmopolitan capitalist milieu based on Indo-European
partnership and competition, in Bombay, Calcutta and Madras.

As a state, the British Empire in India functioned as if it saw itself as the guardian of a system of connected
markets maintained by means of military power, business legislation and monetary management. The flow of goods,
money and skills that this order enabled came as an opportunity for Indian capitalists, and generated an
industrialization that was quite offbeat in world history. Indian merchants of the port cities, for example, could
access British knowhow and services with little difficulty and find it feasible to set up cotton mills in direct
competition with Manchester. But having defined its role as a guardian of markets, the Empire withdrew into
passivity. Its contribution to infrastructure and welfare was limited. Its only direct contribution was maintaining
peace, construction of irrigation canals and running the railways, and even the last two commitments it met fitfully.
Most South Asians lived in a village, and if that village was located far away from a canal or a railway line, the land
produced just enough value for a bare subsistence. The state did little to transform lives in the remote countryside.
To this failure, another one was added late in the interwar period. The political drive to keep India and Britain linked
became a blunder in the post-Depression years when the British economy faltered and fewer Indians wanted the
dependence to continue. The cynical persistence with the policy led to a fierce backlash among wealthy Indians,
who then funded the nationalist movement. Disgruntled peasants in many regions joined in, turning nationalism into
a mass movement.

With such a mixed record, was there economic growth during the one hundred years of British rule? Was there
increasing inequality in this time? Was the legacy of the Empire to be seen in terms of lasting modernization or
lasting retardation?

The debate around these questions became highly politicized and emotionally charged from before
independence in 1947. The nationalist movement in the final years of colonial rule had popularized a vision of the

past according to which there had been little economic growth and a rise in inequality in the previous century. The
early nationalists suggested that India was forced to buy services from Britain that it did not need in exchange for
export receipts. This unequal exchange showed up as a net deficit on the services account of the balance of
payments, against a net trade surplus with its main partner Britain. The ‘drain’, it was said, was a politically
manipulated payment that compromised India’s capacity to make investment. In the 1960s and 1970s, Marxist
historians added a second mechanism linking the Empire with Indian underdevelopment. The nineteenth century
globalization induced a pattern of specialization wherein India turned into a net exporter of agricultural goods and an
importer of manufactures. The process led to deindustrialization, or unemployment among the artisans, on the one
hand. And it failed to benefit the peasants on the other hand, because high taxes and excessive risks led to
accumulation of rural debts and transfer of landed property from producers to money-lenders. The drain explained
stagnation, and the impoverishment or ‘immiseration’ of the peasants explained inequality.

The main body of statistical research in the field directly or indirectly tests this paradigm of underdevelopment
caused by colonial policy. It is only in the last fifteen-odd years that there have been attempts to explore other

The colonial economy
Early statistical work tested the paradigm by means of measurement of production, income and prices; construction
of the external accounts; labour force reconstruction to test for deindustrialization and estimates of public saving and
investment (Sivasubramonian 2000; Heston 1983; Guha 1992; Banerji 1962; Thorner 1962; Bagchi 1976; Thavaraj
1962). Gross domestic product (GDP) data will be dealt with more fully below. Balance of payments reconstruction
produced good estimates of the outflow on the services. And labour force reconstruction showed a fall in the
employment of artisans during the census years, 1872–1931.

Overall, however, the evidence for the immiseration model was neither conclusive nor uncontroversial. For
example, labour force data revealed an unexplained difference between male and female participation in
manufacturing; a decisive fall in participation characterized women more than men. In the nineteenth century, the
outflow on the invisibles account contained payment for useful services procured from Britain, which should have
contributed to domestic income. If there was deindustrialization in the nineteenth century, the process slowed or
even disappeared in the twentieth century. While credit transaction in volume increased in the countryside, the
extent of transfer of land ownership was very small. Distress sale of crops, a supposed sign of peasant indebtedness,
was questioned in studies that found supply sufficiently responsive to prices, and therefore, profits (Narain 1965).

Recent work has returned to some of these themes, in a more dispassionate way than in the halcyon days of
nationalism and global Marxism. Using prices, one of these works pushes back the date of an industrial decline into
the eighteenth century, thus attributing its onset to domestic issues rather than trade (Clingingsmith and Williamson
2008). Consumption is the point of interest in new research on the artisan, showing that artisanal production and
consumption of craft goods revived after an initial shock (Roy 1999).

Labour force and balance of payments are indirect tests of the hypothesis that the Empire impoverished India.
Trends in GDP should supply a more direct test. What does GDP show?

National income of colonial India

National income estimates based on official statistics are available consistently from 1900 onward; and more
unevenly between 1860 and 1900. National income estimates for colonial India (1857–1947) establish five
propositions about the process of economic change in these years:

(a) GDP, total and per head, increased at modest rates between 1860 and 1914, and at near-zero rates between
1914 and 1947 (Table 8.1).

(b) Agricultural income imparted the strongest effect on GDP (Table 8.1). Agriculture grew by expanding the
land frontier between 1860 and 1914. Land became scarce after 1914, and in some of the older agricultural
tracts, land was losing natural fertility.

(c) Industry imparted a positive effect on GDP (Table 8.1). This effect was a combination of two distinct
processes: a robust growth of modern factories and a slow growth in artisanal industry, which achieved this
growth while changing over from traditional household-based production to wage-based production.

(d) Income from the services imparted a positive effect on GDP (Table 8.1). The services too saw a structural
change. Traditional non-wage services such as bonded labour in villages declined, and modern wage-based
services, such as banking, insurance and foreign trade, expanded.

(e) Labour productivity growth was small throughout, especially so in agriculture (see also Table 8.2). This
feature is best summed up in a recent work: ‘During the late nineteenth century, labor productivity growth was
fastest in industry, as modern industry developed in India, and slowest in services, despite the modernization of
the transport network. During the first half of the twentieth century, although there was respectable labor
productivity growth in industry and services, labor productivity growth in the economy as a whole was held
back by stagnation in agriculture’ (Broadberry and Gupta 2014).

Table 8.1 Average annual growth rates of GDP by sector of origin, 1865–2007

GDP at factor cost, constant prices




Total Population GDP per

1865–1910 1.1 * * 1.5 0.5 1.0

1910–40 0.0 2.3 2.2 1.1 1.1 0.0

Notes: Indian Union from 1950, British India for periods before. The primary sector consists of agriculture,
forestry and fishing; secondary sector of manufacturing, mining, electricity, gas and construction; and the
tertiary sector of trade, hotels and transportation, financial and business services and administration and
defence. For more details and source, see Roy (2012a).

* These rates are unreliable.

Table 8.2 Average annual growth rates of output per employee (% per year)

Agriculture Industry Services GDP

1872–73 – 1900–01 0.4 1.1 0.0 0.4

1900–01 – 1946–47 0.0 1.4 1.0 0.5

Source: Broadberry and Gupta (2014).

As the cited text shows, the growth process of the colonial period, though unimpressive overall, had strengths
that derived from the greater openness of the economy. Industrialization, for example, was financed by private
investment (Table 8.3). These investments were partly procured from Britain and partly domestically resourced but
used to buy skills and machinery from Britain. In turn, industry was relatively more export-oriented. Without the
impetus coming from ‘globalization’, which would mean in the nineteenth century integration with a Britain-centred
world economy, the genesis of Indian industrialization cannot be explained at all.

Table 8.3 Investment ratio and size of government (% of GDP), 1900–2007

Gross investment

Government Private Total Government

1900–13 2.2 4.7 6.9

1913–39 2.0 7.3 9.3 5.2

The real drag on GDP per head was not lack of industrial development, but labour productivity, especially
agricultural productivity. With manufacturing and services doing well and agriculture doing badly, did inequality


The head of the 1891 census remarked that ‘a population spread over such a variety of conditions … cannot be
treated statistically as a whole’ (Baines 1893). Inequality measures, therefore, are important as descriptions of
development, and also as a means to test models of growth or stagnation. Colonial India did see increasing
inequality, but not the kind identified by the immiserating model. There is little evidence of land transfer and class-
polarization in rural India. On the other hand, rise in inequality almost certainly was an effect of the globalization
process, which favoured the resource-rich agricultural tracts and the port cities. For example, average wage in
industry and services increased faster than the average wage in agriculture (compare also the productivity growth
rates). Labour markets were not integrated, and agricultural labourers could rarely access the urban labour market.
The urban–rural wage gap also points to a sustained trend towards increasing inequality.4

Was inequality increasing within agriculture? The extent of actual transfer of land was rather limited, and if the
Madras presidency is representative, inequality in land-holding did not change (Kumar 1975). Peasants were
famously averse to parting with land. Inequality could still increase in the countryside by another process. Increasing
elasticity of labour supply, due to institutional and demographic changes, could depress wages. This effect was
present locally in many areas, though wage convergence in the aggregate was a slow process (Collins 1999). A mild
rise in inequality does show up when we use the wage–GDP ratio in agriculture, which declined between 1873 and
1939 (Roy 2007).

Fred Atkinson’s estimation of national income by occupational classes for 1875 and 1895 is capable of
generating a Gini coefficient of personal income inequality, if we are prepared to make the assumption that peasant
incomes were distributed equally or almost equally across classes (Atkinson 1902). The only possible defence for
such an assumption would be that inequality in agriculture was of low order in colonial South India as well as in the
1950s, by which date consumption surveys became available. Further assuming that agricultural workers were
employed for part of the year, we derive Gini coefficients for India in 1895 in the range 0.26–0.32. This is well
below the levels Simon Kuznets reported for the 1950s, which ranged between 0.4 and 0.5 (Kuznets 1963). Revision
of his analysis of Indian data claimed that Kuznets had over-estimated inequality, and produced ratios that ranged
between 0.3 and 0.4 (Ojha and Bhatt 1964). Again, a slight, but only a slight, increase in inequality is plausible.

Atkinson’s dataset suggests one further conclusion. Even though urban–rural wages diverged, the distance
between the top income and the lowest income narrowed somewhat between 1875 and 1895. Some of the highest
individual earners in 1875 were the European officers in the army and the civil service. As the officer corps in the
army, the police and the railways ‘Indianized’, the number of those earning middling incomes expanded. Outside the
government, the growth of a middle class was represented by the rising number of merchants, contractors, bankers,
money-lenders, doctors, lawyers, managers, clerks and many middle-to-richer peasants who had surplus to sell,
could sell it easily, and thus gained from agricultural trade.

If the hypothesis that rising inequality owed to globalization is correct, then we should see increasing regional
inequality as well. This is so because India was exporting mainly agricultural commodities and natural-resource-
intensive manufactures. Two recent exercises on regional inequality produce slightly contradictory pictures. One of
these observes provincial incomes from reconstructed dataset. The other measures inequality in a mixed set of
benchmarks (but not income) based on an actual survey of district data (Caruana-Galizia 2013; Roy 2014). The

latter finds support for a rise in inequality during 1850–1900, the former does not, for a later time span. Given the
different methodology, the two results are not necessarily contradictory, but both are indirect measures at best.

Few historians would conclude from this evidence that the Marxist paradigm of stagnation and inequality has
failed. But many would consider that the paradigm has more explanatory power in local contexts than as a global
theory of colonialism and development. In any case, current research has moved away from this debate, and has
approached the colonial economy by other routes than drain, deindustrialization, or rural credit. Labour productivity
and public goods are two of these new themes.

Other themes

The older research on growth and inequality more or less bypassed the issue of productivity trends. An important
recent development, led by Susan Wolcott, looks closely at quality and productivity of labour. These works
foreground efficiency and work ethic in a discussion on comparative economic growth. An early application of the
idea suggests that the Indian cotton mill workers had a cultural norm of low effort. This is reflected, for instance, in
high worker-to-machine ratios in textiles. This evidence is viewed differently by others, who see high
worker/machine ratios as the profit-maximizing response to the low cost of Indian labour (Wolcott and Clark 1999;
Wolcott 1994; Gupta 2008). The low cost of labour is indirectly linked to low agricultural yield.

The older political critique of the colonial state was preoccupied with its role in sustaining unequal exchange.
More recent research has explored another dimension, public goods and welfare.5 That the British Indian state made
limited investment in infrastructure and welfare is well known. But the public goods and infrastructure that it did
produce was also regionally variable (Map 8.2 shows the highest density of railways near the production centres of
wheat in Punjab and along the Ganges). A cluster of recent papers explore the reasons, and emphasize institutions,
local autonomy and fiscal resources (Banerjee and Iyer 2005; Iyer 2010; Chaudhary 2010). The major field of
public–private investment in British India, the railways, has been the subject of fresh research, and the verdict of this
research is rather favourable to the state.6 A broader notion of efficiency as tradability is explored in two papers on
market integration, one on agricultural labour in the colonial period, and the other on grain markets for an earlier
period (Collins 1999; Studer 2008). Both papers find the level of market integration relatively small in the

Map 8.2 Regional economic specialization in South Asia during the late nineteenth and early twentieth century

Source: see map 1.1.

Partly, the motivation to seek new research questions in the recent years comes from a desire to integrate India
with current discourses on comparative economic development. Institutions, public goods, worker efficiency – all of

these themes do this in different ways. But the divergence debate of the last decade achieved a deeper integration.

Living standards in the long run
The divergence debate is significant, among other reasons, because it asks the question of when India started falling
behind western Europe. Making a useful contribution to that question requires going further back in time than an
Empire-focused economic history of South Asia normally does. The major contribution by Kenneth Pomeranz
studies early modern China and shows that around 1800 China was like western Europe in many respects (Pomeranz
2000). A similar point was earlier advanced by Prasannan Parthasarathi with Indian data (Parthasarathi 1998). These
works, as well as independent advances in the use of anthropometric data, encouraged research on the measurement
of living standards in the long run. The material can be divided into four clusters: real wage, height, consumption
and morbidity-mortality. Of these clusters, the second (height) is omitted from the current chapter because it is
discussed more fully elsewhere in the volume (see the Interlinking Chapter I8 by Baten and Inwood, and the


Using wage data in tests of the welfare implication of colonial rule is not a new practice. The oldest tradition in
quantitative history among Indian scholars made use of wage series. But then as now, the wages used were of
questionable value because of unresolved sampling bias issues.

The long-term wage-series used most often come from two early twentieth century Indian economists, Brij
Narain and Radhakamal Mukherjee (Narain 1929; Mukherjee 1967). Both start from c. 1600, and both rely for their
earlier wages on English and Dutch East India Company records. For example, based mainly on Dutch reports of
wages paid out to unskilled and semi-skilled labourers in the Mughal establishments (Rs. 3–10 per month), and what
the Dutch factory paid out to a similar class of workers, one of these authors concluded that ‘the most common rate
of wages for ordinary unskilled work at the time of Jehangir [1605–27] was about Rs. 3 per month’ (Narain 1929:
13). With wheat selling at 84 kg to a rupee, and spring millet at half that price, the wage converts into a quantity of
grain that would amount, at 2011 retail prices of wheat or millet, to 4–8 times the poverty line in 2011. The then-
and-now comparison enabled Narain, a nationalist, to contend that manual workers in Mughal India were lavishly
well-off compared with his own time. Mukherjee reached a similar result using similar data.

These results are questionable. The ‘labour market’ the Dutch Company accessed in this time could not be a
representative one. Being foreigners they had little bargaining power and being the biggest merchant firm, they had
deep pockets. It would be unrealistic to expect that these rich and tiny coastal enclaves were in any way
representative of any general pattern. The same point would apply to the princely establishments. The market in
Delhi or Agra was not integrated with the rural markets, as the Aligarh historians suggest. Migration of peasants and
labourers to the Mughal cities, for example, was rare. The city wages would not be comparable with city wages in,
say, 1900, when workers did circulate between the village and city more frequently.

Parthasarathi shows that, around 1800, real wages were relatively high in the Kaveri river delta thanks to high
productivity of agricultural land (Parthasarathi 1998). With these wages as benchmark, the nineteenth century would
have seen a significant regress in conditions of labour. The coastal wages again form a special high-wage sample.
How greatly wages could vary between the coast and the interior was illustrated in the evidence of a Madras officer
Thomas Cockburn, who collected data on the wages of Madras labourers from around 1800 (British Parliamentary
Papers 1812–3: 270). The per head annual expenditure of a labour family was 77 per cent higher than agricultural
wages in the interior, confirming his own conjecture that ‘in the interior price of labor … must of course be much
lower than in Madras’. These differences reflected yield differences between irrigated and dry-land agriculture. The
variation was so large when sample surveys were first available that it should be factored in as a fundamental
condition of labour markets at all times. Few wage studies acknowledge the point.

In subsequent work using mainly Mukherjee’s dataset and reworked prices (silver and millet values were more
stable than wheat or rice in the long run), a fall in real wage and welfare is confirmed, but its extent was relatively
modest (Allen 2005). Also, some classes of urban wages increased in the long run (Chandra 1983). The general fall
is consistent with a global trend in the three centuries outside of England and Holland. But given the quality of the
wage data, we should keep an open mind about the extent of the fall over 1600–1900.

The density of agricultural wage data improves greatly around 1800, enabling us to test if the fall happened in
the nineteenth century or earlier. Not all of these data have been used yet. Around 1800, the first ‘survey’ of wages
and living conditions that is known to exist was conducted by Thomas Munro, the architect of the ryotwari peasant

property system in South India. Munro studied a region of the south the British knew especially well. This was the
so-called Ceded Districts, a semi-arid tract of land the Nizam of Hyderabad gifted to the Company to pay for
military protection. Soon after possession in 1796, Munro instituted a survey of living conditions. Details of the
survey are unavailable, except Munro’s own words, that ‘a great number of statistical tables were drawn up …
containing the price of labor and subsistence’ (British Parliamentary Papers 1812–3: 124). Tables were also drawn
showing the average consumption of three classes of inhabitants, the relatively rich, the middling and ‘the poorest
class of people’. Again, the precise definitions are not available. But from Munro’s description, the numbers relate
to a notion of subsistence consumption for the poor (including food, shelter and clothing), and average or sufficient
consumption for the other two classes. These data are shown in Table 8.5. The wage is available by month, and
converted into annual assuming a full year of work available. This was never the case, but annual wage contracts
were common in the area in this time. With four members to a labouring family, and one earner, one can see why
Munro believed that the wage was ‘not more than adequate to the subsistence of a labourer and members of his

Table 8.4 Size of the external sector (% of GDP)

Merchandise trade
(export plus import)

Net foreign aid Net foreign direct

Net invisible

1910–14 20.0 0.0 0.0–1.0 −3.0

1956 13.6 0.6 0.0 1.2

Note: Indian Union in 1956, British India for periods before.

Table 8.5 Survey of living conditions in peninsular South India c. 1800

Wage of agriculture labourer (annual,
converted from monthly wage)

Consumption per head of the whole
population (annual)

Rich 40 s or Rs. 20

Middle 27 s or Rs. 13.5

Poor 48–72 s or Rs. 24–36 18 s or Rs. 9

Francis Buchanan Hamilton was another Company employee to have carried out something like a systematic
wage survey in Bihar in 1809–10 (Majumdar 1934–35). Some of the figures are too low to be believable (possibly
referred to adolescents and helpers). The modal number fell in the range Rs. 12–15 per year, after converting grain
wages into cash. This is more or less identical with Munro’s peninsular wages, adjusted for grain price about double
that in Bihar. These numbers are remarkably close to many others that we find elsewhere, for example, Rs. 12–14 in
eastern India c. 1785, and Rs. 16–22, again in eastern India c. 1810 (Roy 2011).

Converting money wages of agricultural workers into annual entitlement of grain in weight, and adding
present-day averages, we get Table 8.6, which suggests that the purchasing power of an agricultural labourer wage
did not change in any direction from 1784 until the Green Revolution of the 1970s. The one short-lived spike in
1784–1810 can be attributed to the fact that Bengal wages were recovering from the depopulation caused by the

1770 famine. If in the middle decades of the nineteenth century there was a mild increase in real wage, the effect
disappeared quickly because of changes in labour supply.

Table 8.6 Agricultural wage in money and grain, 1784–2011

Region Money wage
(annual in Rs.)

Kg of wheat per


1784–88 Bihar and Bengal 12–17 2.2 See text

1809–10 Madras, Bihar 12–15 (Madras)
14–22 (Bihar)

2–2.5 Buchanan Hamilton,
Munro (see text)

1875 British India 62 2.6 Atkinson (1902)

1895 British India 72 2.2 Atkinson (1902)

1950 Indian Union 295 2.2 India

2011 Indian Union 29,700 5.7 Gulati, Jain, Satija

What did this wage mean? The long-term average of about 2 kgs per day per worker is equivalent to barely
adequate caloric needs for a family of four, assuming 80 per cent of the wage is spent on food.7 However, it is a
precarious adequacy, a slight fall in employment intensity or slight rise in prices could induce disaster.


Conjectures on the long-term trend in consumption would be more difficult to make. The first large-scale family
budget surveys did not become available before the interwar years. These surveys, however, produced a startling
fact. Nutrition experts who used these surveys set the norm of carbohydrate consumption by an Indian at 437–500
grammes per adult per day (Thomas and Ramakrishnan 1938: 405–6; Bombay 1940: 69–70; Aykroyd 1940). A
family of four in 1800 just reached the lower threshold assuming it consumed only grain. Such a diet might generate
the required energy in an adult, it was not sufficient to ensure the physical development of children. There is ample
evidence that cereals did dominate the Indian diet even when there was money to buy other things. Descriptions of
Indian diet we find in European travelogues of the 1600s were consistent with this picture.

In the 1920s, surveys of agricultural labourers in Bihar noted their ‘very simple diet consisting practically of
rice, pulse and some vegetables. Their children are hopelessly under-nourished inasmuch as they do not get
practically any milk at all’ (Thakur 1937; Mehta 1938; Sarkar 1948–49; Hossain 1938–39). In South India,
excessive rice consumption slowed down protein absorption, and low levels of vegetable and milk consumption led
to the prevalence of sub-acute forms of scurvy among working classes and rickets among the working class children,
the former a result of Vitamin C deficiency, and the latter of Vitamin D deficiency (Indian Government 1927: 732).
In 1936, 94 per cent of the daily calorie intake by an adult male in north India came from grains, 4 per cent from
roots and vegetables and 0.7 from animal protein. The corresponding percentages in China were 90, 9 and 1; and in
the US, 39, 9 and 39. Dietary habits differed between regions of India. But the high preference for cereal and low
protein intake was the norm.

This was changing in the 1930s in one respect, cereal preference diversified. Two surveys of the same village
in South India (1917 and 1938) revealed a substitution of high-calorie grain (rice) for coarse grains, increased
consumption of milk, clarified butter, sugar, coffee and tea. But the consumption of meat and vegetables rose only
slowly. One contemporary study postulated that the preference for cereals was increasing on account of relative
price shifts, in turn an effect of the conversion of pastures and commons into grain-producing land. Vegetarianism,
according to this author, was reinforced by an ecological imbalance (Mukherjee 1936–37).

Poverty does not explain why Indian food consumption was unhealthy, that is, why it was marginally adequate
for working but inadequate for bodily growth. Cultural preference was important too. For example, in the
comparison between India, China and US, the reference group came from Punjab and were well-off enough to buy
meat, fish or milk. Postcolonial public health picked up the point for discussion. How little nutritional status
changed in the next forty years shows the persistence of dietary culture. The green revolution did not solve the
nutrition problem. An analysis of ‘food balance sheets’ concludes that, ‘over the entire 1937–95 period, energy
supplies increased by only 18 percent, and protein supplies by only 4 percent. It is a poor performance by
international standards and by comparison to other nearby Asian countries’ (Hopper 1999).

If we look outside of food, there was much sign of dynamism. Cotton cloth consumption per head increased
from about 6 yards in 1795 to 15 yards in 1938 (Roy 2012c). The increase in the consumption of clothing was
subdued during 1795–1880, but very rapid during 1880–1940. Iron manufactures, not counting railway material,
were among the fastest growing items of import. The trade statistics do not permit an estimate of volume. In value,
iron articles increased from £0.1 million in 1840 to £5 million in 1914. Some of these articles were used in

construction, but some of it went into consumer durables like cooking utensils and cutlery. Consumption of services
and many other household articles also increased and became more diverse in quality (Kumar 1987).

Like consumption and wages (and possibly heights), mortality and child mortality changed slowly between the
early nineteenth century and the early twentieth.

Mortality and morbidity

Towards the end of the eighteenth century, it was a custom among the European residents of Calcutta to gather
together on 15 November every year. The occasion was to congratulate each other for staying alive one more year.
The custom was not practised by 1835. But the conditions remained bad. ‘There is no city in the world which
contains within itself more numerous or deleterious agents prejudicial to health’, a Bengali doctor was quoted in an
1850 paper published in the Journal of the Statistical Society of London (Finch 1850). He ‘does not see in the town
of Calcutta any children that are in perfect health’. The source of these statements is a survey done around 1836,
certainly the first of its kind, of disease and death rates in India (Finch 1850). The data presented suggest that
Calcutta had an average death rate of 51 per 1,000, and an infant mortality rate of 240. In the first census decade
1871–81, the corresponding numbers were 41 and 260 respectively. Of course, the reference areas are completely
dissimilar. But there may have been a rise in infant mortality due to the effects of the 1876 famine and the inclusion
of northern and central India in the latter figures. On the other hand, the fall in the death rate could reflect some
improvement in adult survival rates, at least in the port cities such as Calcutta. In any case, the levels were high, and
any change marginal until 1921. The 1836 survey also brought out one remarkably persistent feature of the
population, variability of health status between communities. The death rate among the English population was 35;
among the Armenians and other Europeans 40–60, among the Indo-Portuguese 125, among Hindus 65 and Muslims
28. To some extent, these differences arose due to the presence of more households among the Portuguese and the
Hindus. These figures suggest that the Europeans were not any more vulnerable to the Indian environment than the
Indians themselves. In fact, they coped better than some locals.

These conditions did not respond to manmade intervention until the expansion of public health around 1921,
suggesting that their source was partly environmental and cultural. In 1901, India belonged in a class of countries,
along with Chile and Egypt, with exceptionally high infant mortality rates (Chandrasekhar 1959). Net food
availability would have improved between 1836 and 1921, but famines increased the risk of death from epidemics,
industrialization and migration to the cities increased the risk of contagion, and neonatal deaths due to avoidable
causes such as asphyxia and malnutrition continued to be high. The factory labour settlements and labour colonies in
the plantations had above average infant mortality, among other reasons because of congestion.8

The overall pattern of the colonial era experience was therefore that of poor, uncertain and almost unchanging
lives for many, and highly dynamic commercial and industrial cities on the margins. Did it change after 1947? Did
postcolonial India bridge the gap between these two images?

Postcolonial India: revolution or involution?
Despite the much greater density of statistical data in the period after independence (1947), economic historians
have rarely tried to connect the postcolonial pattern of change with colonial or precolonial patterns. Most time
series, such as GDP, prices or cost of living, have a break around 1947 and the comparability between datasets
before that date and those after is not perfect. One obstacle to long-range history is the radical departure of state
policy after 1947. But, this section will show, deeper continuity can still be found.

In 1947, the South Asian mainland was partitioned into two countries, India and Pakistan, and in 1971, a
further division took place with the birth of Bangladesh. Despite these far from peaceful changes in the map, the
transition to a national economy in each case, especially in India, occurred with relatively little friction, owing to
substantial continuity in institutions and an indigenization of the bureaucracy effected in the final years of the
Empire. The measures included the legislative reforms of 1919 and 1935.

After independence, the Indian Union chose to carry out import-substitution and state-directed industrialization.
The strategy, which was a departure from the market system of the Empire era, received immediate support from the
nationalist critics of ‘drain’ and free trade discussed before, the export pessimists ruling the world in the 1950s, and
socialist lobbies within the Congress that advocated central planning. It was reinforced further in the 1960s by
global Marxism and its offshoots, dependency and world systems school, who rediscovered the Indian nationalist
texts. The underlying historiography suggested that free trade had harmed India, that British colonialism extracted
surplus value from India and transferred it to Britain, and that in order to carry out this activity colonialism needed
collaborators, thus increasing inequality in India. The lesson learnt was that India needed to insulate its economy
from trade and investment and build a strong state and closely regulated markets.

There was a large increase in government expenditure and investment. Protection was raised to very high levels
and reinforced with non-tariff barriers. Commodity export was discouraged. The fear of a recurrence of famines and
shortages led to state control over grain trade. Independent India, thus, set out to replace the Empire’s legacy of a
small state, free market and open economy with a large state, public control of markets and assets and an insular
economy. Faced with a series of macroeconomic crises, the development regime from the 1990s reduced the
dominance of the state and reduced barriers to trade and foreign investment. The subsequent period, however, is still
too recent to fit into the present chapter, so that the search for deep continuity will stop more or less at the time
import-substituting industrialization was partially dismantled, the end of the 1980s.

The differences between the two periods (1857–1947 and 1947–85) are obviously very large. The essential data
are shown in Table 8.7, in the same format as in Tables 8.1–8.4, to enable easy comparison. The comparison shows
an enlargement of the state, and significant increases in GDP growth rates across the board. But there was limited
success in overcoming the productivity barrier. The subsection on GDP growth earlier in the chapter sums up the
colonial experience in five propositions. Let me now add five more, exactly parallel, propositions to capture the
experience of postcolonial India.

(a) GDP, total and per head, growth rates in 1950–2000 were well above those in the previous ninety years
(Tables 8.1 and 8.7).

(b) All three sectors of the economy – agriculture, manufacturing and services – registered acceleration (Tables
8.1 and 8.7). In agriculture, the acceleration owed to the green revolution which took shape in the 1970s. The
main difference with the colonial period was that extensive growth utilizing surplus land in 1860–1950 was
replaced by productivity-led growth thanks to high-yielding variety seeds, chemical fertilizers and more
intensive application of water. The state subsidized all three inputs, seeds, fertilizers and water.

(c) In industry, too, the proximate sources of growth changed. The colonial period had seen an expansion of the
relatively labour-intensive sectors financed by private capital. During 1950–85, manufacturing was more
capital-intensive, financed significantly by the state and foreign aid, and took place partly in state-owned firms.

(d) Within the services, there was a retreat of foreign trade-related services as the economy became partially
closed, whereas a large expansion occurred in the government.

(e) On productivity, a similarity emerges between the colonial and the postcolonial eras (Tables 8.2 and 8.7).
The finding confirms the conclusion of a recent study on long-range growth in India: ‘During the second half of
the twentieth century, respectable labour productivity growth in industry and services has again been offset by
slow productivity growth in agriculture’ (Broadberry and Gupta 2014).

Table 8.7 Consolidated data on economic growth and structural change in India, 1950–2007

Average annual growth rates of GDP by sector of origin, 1950–2007

GDP at factor cost, constant prices




Total Population GDP per head

1950–64 3.0 6.8 3.8 4.1 1.9 2.1

1965–85 2.5 4.3 4.4 3.6 2.3 1.4


3.4 6.8 7.1 6.3 1.7 4.6

Average Annual Growth Rates of Output per Employee (% per year)

Agriculture Industry Services GDP

1950–51 – 1970–71 0.9 3.4 2.8 1.9

1970–71 – 1999–

0.9 2.7 2.3 2.5

Investment ratio and size of government (% of GDP), 1950–2007

Gross investment Government

Government Private Total

1950–64 5.3 6.1 11.4 12.9

1965–85 7.5 4.6 12.1 16.4

1986–2007 7.5 16.5 24.0 11.7

Size of the external sector (% of GDP)

Merchandise trade
(export plus

Net foreign aid Net foreign direct

Net invisibles

1956 13.6 0.6 0.0 1.2

1970 7.0 1.0 0.0 −0.3

1980 14.4 1.3 0.0 2.9

2006 33.4 0.0 1.6 5.6

A balanced comparison between the colonial and the postcolonial periods cannot just look at GDP and
conclude that the postcolonial statist regime did a great job, but should also look at the productivity problem, and at
sources of GDP growth. GDP growth after 1950, though higher than before, was achieved at great cost. The greatest
strength of the colonial period growth was that it was funded entirely by private capital, the state merely overseeing
the capitalistic system that created opportunities for private accumulation. The postcolonial industrialization and the
green revolution, by complete contrast, were largely funded by the taxpayers’ money and foreign aid. Economic
growth in 1950–85 needed a larger state, and involved a redistribution of taxes from public goods to private goods
(mainly subsidies to farmers and state enterprises; note the gap between government expenditure and government
investment). The policy involved restraining private investment, a retreat from world trade and foreign capital
markets (Tables 8.4 and 8.7), crowding out and a neglect of healthcare and education. The period after 1985 can be
seen as a course correction at many levels. It has, however, created its own problems. For example, while private
investment and foreign trade revived, subsidy to peasants increased, and a partial withdrawal of the state from
infrastructure saw agriculture sink back to slow growth.

To sum up, any comparative assessment of the two periods of history using national income data should
confirm that the long-term constraint on Indian development lies in agricultural productivity.

The economic history of South Asia started more or less as a discourse serving political ends, and one preoccupied
with the British Empire in the region. Empirical work has shed some of the political drive and diversified research
away from politics towards resources, institutions, efficiency, choice and welfare. For historians groomed in a
nationalistic tradition in India, or influenced by the neo-Marxist immiseration paradigm, the Empire was the most
fundamental force of change, and 1947 represented the end of a dark age and the break of a new dawn. With
attention shifting towards a wider range of themes, quantitative economic history suggests that neither was the
colonial era a dark age, nor was the postcolonial India a new dawn. In the former era, even as rural wage, GDP and
food consumption were stagnant, urban wage rose, there was diversification in consumption, demographic transition
and industrialization financed by commercial profits. In the second era, despite much faster GDP growth, there was
stagnation in productivity, efficiency and nutrition, and the growth process, being funded by foreign aid and tax-
payers’ money, was not sustainable. The 1990s liberal economic reforms confirm that point.


1. In this chapter, I use ‘South Asia’ and ‘colonial India’ interchangeably. According to the context of the
discussion, ‘India’ refers to either colonial India or the Indian Union.

2. On these and other historiographical debates on precolonial India, see discussion in Roy (2012a), and Roy

3. A representative recent collection of essays is Riello and Roy (2009).

4. Roy (2007), on 1875–1939; Williamson (2000), finds a different result for the interwar period.

5. A representative collection of articles on the new turn in the historiography can be found in Chaudhary et al.

6. Donaldson (2010) revisits the welfare effects, and Bogart and Chaudhary (2012) reassess management after
state takeover.

7. This is close to what Broadberry and Gupta (2014) also find.

8. On migration, see also Highlight Chapter 8.1.

Further reading

Banerjee, A. and Iyer, L. (2005), ‘History, Institutions, and Economic Performance: the Legacy of Colonial Land
Tenure Systems in India’, American Economic Review 95 (4), 1190–213. Applies institutional economics to infer
long-term effects of colonial property right reforms – an example of recent quantitative history scholarship.

Broadberry, S. N. and Gupta, B. (2016), ‘Indian Economic Performance and Living Standards: 1600–2000’, in L.
Chaudhary, B. Gupta, A. Swamy and T. Roy (eds.), A New Economic History of Colonial India, London: Routledge.
An innovative reconstruction of long-range GDP and standard of living data for the South Asian region.

Chaudhary, L., Gupta, B., Swamy, A., and Roy, T. (eds.) (2015), A New Economic History of Colonial India,
London: Routledge. Contains a set of commissioned critical surveys of a range of themes, contributed by scholars
active in the field, and aimed as a handbook for the student.

Parthasarathi, P. (1998), ‘Rethinking Wages and Competitiveness in the Eighteenth Century: Britain and South
India’, Past and Present 158, 79–109. An early statement, using Indian evidence, of what is now known as the
divergence debate.

Roy, T. (2012a), The Economic History of India 1857–1947, Delhi: Oxford University Press. A widely used student
text, the book offers a detailed descriptive survey of the field.

Roy, T. (2012b), ‘Consumption of Cotton Cloth in India 1795–1940’, Australian Economic History Review 52 (1),
61–84. A reconstruction of textile data and a measurement of deindustrialization in nineteenth-century India.

Roy, T. (2013), An Economic History of Early Modern India, London: Routledge. An attempt at a synthesis of
economic history scholarship relating to the eighteenth century, a debated field.

Wolcott, S. and Clark, G. (1999), ‘Why Nations Fail: Managerial Decisions and Performance in Indian Cotton
Textiles, 1890–1938’, Journal of Economic History 59 (2), 397–423. An argument about comparative history based
on efficiency of the industrial work-force.


Allen, R. C. (2005), ‘Real Wages in Europe and Asia: a First Look at the Long-term Patterns’, in R. C. Allen, T.
Bengtsen and M. Dribe, Living Standards in the Past: New Perspectives on Well-being in Asia and Europe, Oxford
University Press, 111–30.

Atkinson, F. J. (1902), ‘A Statistical Review of Income and Wealth in British India’, Journal of the Royal Statistical
Society 65, 209–83.

Aykroyd, W. R. (1940), Note on the Result of Diet Surveys in India, Simla and New Delhi: Indian Research Fund

Bagchi, A. K. (1976), ‘Deindustrialization in India in the Nineteenth Century: Some Theoretical Implications’,
Journal of Development Studies 12 (2), 135–64.

Baines, J. A. (1893), ‘Distribution and Movement of the Population in India’, Journal of the Royal Statistical
Society 56 (1), 1–43.

Banerji, A. (1962), India’s Balance of Payments, Bombay: Asia.

Bogart, D. and Chaudhary, L. (2012), ‘Railways in Colonial India: an Economic Achievement?’, Warwick
University Working Paper.

Bombay (1940), Report of the Textile Labour Inquiry Committee, Vol. II (Final Report), Bombay: Government

British Parliamentary Papers (1812–3), Select Committee, and Committee of Whole House of Commons, on Affairs
of East India Company Minutes of Evidence (Trade and Shipping, and Renewal of Charter).

Caruana-Galizia, P. (2013), ‘Indian Regional Income Inequality: Estimates of Provincial GDP, 1875–1911’,
Economic History of Developing Regions 28 (1), 1–27.

Chandra, S. (1983), ‘Standard of Living I: Mughal India’, in T. Raychaudhuri and I. Habib (eds.), The Cambridge
Economic History of India Vol. 1: c. 1200–c. 1750, Cambridge University Press.

Chandrasekhar, S. (1959), Infant Mortality in India 1901–55, London: George Allen and Unwin.

Chaudhary, L. (2010), ‘Land Revenues, Schools and Literacy: a Historical Examination of Public and Private
Funding of Education’, Indian Economic and Social History Review 47(2), 179–204.

Clingingsmith, D. and Williamson, J. (2008), ‘Deindustrialization in 18th and 19th Century India: Mughal Decline,
Climate Shocks and British Industrial Ascent’, Exploration in Economic History 45 (3), 209–34.

Collins, W. (1999), ‘Labor Mobility, Market Integration, and Wage Convergence in Late 19th Century India’,
Explorations in Economic History 36 (2), 246–77.

Donaldson, D. (2010), ‘Railroads of the Raj: Estimating the Impact of Transportation Infrastructure’, NBER
Working Paper No. 16487.

Finch, C. (1850), ‘Vital Statistics of Calcutta’, Journal of the Statistical Society of London, 13 (2), 168–82.

Guha, S. (ed.) (1992), Growth, Stagnation or Decline? Agricultural Productivity in British India, Delhi: Oxford
University Press.

Gupta, B. (2008), ‘Work and Efficiency in Cotton Mills: Did the Indian Entrepreneur Fail?’, University of Warwick
Working Paper.

Heston, A. (1983), ‘National Income’, in D. Kumar (ed.), The Cambridge Economic History of India, Vol. 2,
Cambridge University Press, 376–462.

Hopper, G. R. (1999), ‘Changing Food Production and Quality of Diet in India, 1947–98’, Population and
Development Review 25 (3), 443–77.

Hossain, S. S. I. (1938–39), ‘Report of the Family Budget Enquiry into the Conditions of the Weavers of Bihar
Sharif’, Patna College Chanakya Society, Annual Report, 31–7.

Indian Government (1927), Royal Commission on Agriculture in India, Vol. III, Evidence taken in the Madras
Presidency, Calcutta: India Government Press.

Iyer, L. (2010), ‘Direct versus Indirect Colonial Rule in India: Long-term Consequences’, Review of Economics and
Statistics 92 (4), 693–712.

Kumar, D. (1975), ‘Landownership and Inequality in Madras Presidency: 1853–54 to 1946–47’, Indian Economic
Social History Review 12 (3), 229–61.

Kumar, D. (1987), ‘The Forgotten Sector: Services in Madras Presidency in the First Half of the Nineteenth
Century’, Indian Economic and Social History Review 24 (4), 367–93.

Kuznets, S. (1963), ‘Quantitative Aspects of Economic Growth of Nations: Vol. VIII. Distribution of Income by
Size’, Economic Development and Cultural Change, 11 (2), 1–80.

Majumdar, B. B. (1934–35), ‘Agricultural Labour in Bihar in the First Half of the Nineteenth Century’, Indian
Journal of Economics 15 (4), 669–76.

Mehta, S. N. (1938), ‘General Economic Condition of Shantipur’, Patna College Chanakya Society, Annual Report,

Mukherjee, R. K. (1936–37), ‘The Relation between Human and Bovine Population Pressures in India’, Indian
Journal of Economics 17 (2), 249–63.

Mukherjee, R. K. (1967), The Economic History of India: 1600–1800, London: Longmans Green.

Narain, B. (1929), Indian Economic Life: Past and Present, Lahore: Uttar Chand Kapur and Sons.

Narain, D. (1965), The Impact of Price Movements on Areas under Selected Crops in India 1900–1939, Cambridge
University Press.

Ojha, P. D. and Bhatt, V. V. (1964), ‘Pattern of Income Distribution in an Underdeveloped Economy: a Case Study
of India’, American Economic Review 54 (5), 711–20.

Pomeranz, K. (2000), The Great Divergence: China, Europe, and the Making of the Modern World Economy,
Princeton University Press.

Riello, G. and Roy, T. (eds.) (2009), How India Clothed the World, Leiden: Brill.

Roy, T. (1999), Traditional Industry in the Economy of Colonial India, Cambridge University Press.

Roy, T. (2007), ‘Globalization, Factor Prices, and Poverty in Colonial India’, Australian Economic History Review
47 (1), 73–94.

Roy, T. (2011), ‘Economic Conditions in Early Modern Bengal: a Contribution to the Divergence Debate’, Journal
of Economic History, 70 (10), 179–94.

Roy, T. (2012c), India in the World Economy from Antiquity to the Present, Cambridge University Press.

Roy, T. (2014), ‘Geography or Politics? Regional Inequality in Colonial India’, European Review of Economic
History 18 (3), 324–48.

Sarkar, S. (1948–49), ‘Economic Survey of the Village Khirhar’, Patna College Chanakya Society, Annual Report,

Sivasubramonian, S. (2000), National Income of India in the Twentieth Century, Delhi: Oxford University Press.

Studer, R. (2008), ‘India and the Great Divergence: Assessing the Efficiency of Grain Markets in Eighteenth- and
Nineteenth-Century India’, Journal of Economic History 68 (4), 393–437.

Thakur, R. B. (1937), ‘Land Tenure in Taregna’, Patna College Chanakya Society, Annual Report, 57–64.

Thavaraj, M. J. K. (1962), ‘Capital Formation in the Public Sector in India: a Historical Study, 1898–1938’, in
V. K. R. V. Rao (ed.) Papers on National Income and Allied Topics, Delhi: Allied Publishers.

Thomas, P. J. and Ramakrishnan, R. C. (eds.), (1938), Some South Indian Villages: a Resurvey, University of

Thorner, D. (1962) ‘“Deindustrialization” in India, 1881–1931’, in D. and A. Thorner, Land and Labour in India,
New York: Asia.

Williamson, J. (2000), ‘Globalization, Factor Prices and Living Standards in Asia before 1940’, in A. J. H. Latham
and H. Kawakatsu (eds.), Asia Pacific Dynamism 1500–2000, London: Routledge, 13–45.

Wolcott, S. (1994), ‘The Perils of Lifetime Employment Systems: Productivity Advance in the Indian and Japanese

Textile Industries, 1920–1938’, Journal of Economic History 54 (2), 307–24.


Human stature as a health indicator in colonial

Joerg Baten and Kris Inwood

There has been considerable debate about the impact of European colonial empires on other world regions. Karl
Marx in the 1850s argued that colonialism had a modernizing function and prepared the countries for later
communist take-overs. Modern Marxist writers (Sender and Smith 1986) tend to support this view, as do some
economists at the other end of the ideological spectrum (Ferguson 2003). In contrast, most historians identify
disadvantages to colonial status including adverse social and economic effects as well as the lack of political
freedom (Huillery 2014). Adult stature reflects childhood health and nutrition and thereby provides fresh new
evidence for colonial living standards.1 Admittedly, stature is not the whole story; it reflects important but particular
aspects of living standards among the young.2

A number of recent studies present a nuanced view of living standards during colonialism. For example,
Frankema and van Waijenburg (2012), Moradi (2009), and Cogneau and Rouanet (2011) find evidence in Africa of
public health improvements and relatively high real wages (in comparison to Asia at least) under colonial
administration. However, the evidence is limited to the colonial period, whereas it would be important to mobilize
evidence for the period before colonialism in order to assess fully its effects. Anthropometric evidence may be
helpful in this context.

What are the sources of evidence about human stature before, during and after colonialism? The
anthropological sciences developed during the nineteenth century; the study of human stature was one of its priority
fields. Some European anthropologists undertook extended journeys to Africa, Asia and the Americas, during which
they measured the height of many indigenous people.3 Evidence of this nature sheds light on the development of
Africa during the infamous ‘Scramble’ by European powers for African colonies during the 1880s and 1890s. In
Figure I8.1 we report the average stature recorded in various countries according to their colonizing country.

Figure I8.1 African stature by colonizing country of c. 1900

Source: based on Baten and Blum (2014) (note for example, ‘German’ colonies had later other metropoles).

Before the 1880s, most African countries were either uncolonized or the colonial power held only small trading
posts. Only the Portuguese colonies, South Africa and the plantation island economies (Mauritius, Réunion, etc.)
had been colonized earlier. Hence the majority of Africans born during the 1860s and 1870s grew up before the
advent of direct colonization. We see in Figure I8.1 that their heights were declining during the period of the
‘Scramble’, reaching a low point during the 1890s. Thereafter, we observe a mild recovery and more or less
stagnating height until the 1930s. From the 1940s onwards heights in the colonies of the British and French Empires
expanded until the 1960s. In contrast, the Portuguese colonies had been established earlier and show a different
profile of stature. Initially heights were low here but in the period from the 1880s they reached a somewhat higher
level. The 1920s were a low point. Unlike the British and French colonies, stature in the Portuguese colonies did not
improve during the 1930–60s period.

Thus, the first decades of the ‘new’ colonies of England, France and Germany experienced declining health and
nutrition. Towards the end of the colonial period, however, the investments in basic public health and at least basic
education bore fruit (Moradi 2009). In addition, African ‘rural capitalist’ peasants achieved higher income in some
colonies (see Chapter 10 in this volume). In contrast, the Portuguese colonies probably suffered from this
colonization shock much earlier. Further, the Portuguese did not invest as much in public health and education
during the later nineteenth and twentieth centuries and did not see the same growth of stature in this period.

Yet another experience is revealed in Figure 8.2 and Figure 9.3 in Chapter 9 on Southeast Asia by Shanahan in
this volume. Stature was large before colonization in Cambodia (colonized 1863) and Myanmar (colonized 1886).
Both populations experienced a reduction in stature in the decades following colonization. Thailand, which was
never colonized, consistently had the greatest or second-largest stature in the region. Subsequently, after the Second
World War, stature rose throughout the region in spite of setbacks originating in military conflict (e.g., the Vietnam
War) and severe political regimes (e.g., Cambodia).

A direct comparison of Thailand and Iran with India is interesting because the latter was controlled by Great
Britain while Thailand and Iran remained independent (Figure I8.2). Before the 1920s Iranians were taller on
average than Indians who were somewhat taller than the Thais, with no tendency for increase or decrease in any of
these countries. After the Second World War, however, the two countries that retained political independence were
able to realize considerable improvement in stature. India, on the other hand, in spite of gaining independence in
1947, increased stature more slowly. The experience of colonialism may have contributed to a stagnation of Indian
stature in the later nineteenth and early twentieth centuries (Brennan et al. 1994), just as its legacy may have limited
the gain in stature after independence.4

Figure I8.2 Height development in India, Iran and Thailand (male)

Source: based on Baten and Blum (2014).

An entirely different experience of colonialism is visible in the ‘settler colonies’, which attracted European
immigrants on a large scale in the nineteenth century. Australia, Canada, New Zealand and South Africa inherited
similar British institutions in diverse biophysical environments. Their immigrant populations were largely similar
although the indigenous peoples of course were distinct. Europeans moving to the settler colonies enjoyed a
fundamentally healthy environment with high incomes, cheap food and low population densities. Not surprisingly,
the migrants and their descendants were tall, on average. New Zealand and South African whites were among the
tallest in the world, although in both societies the indigenous population fared much worse (Inwood, Oxley and
Roberts 2010, 2015; Inwood and Masakure 2013). There was considerable inequality of stature even among the
whites (Cranfield and Inwood 2015a, 2015b). Colonial status did not impede the realization of good health, on
average, although equally there is no sign of rising stature despite strong economic growth in the nineteenth century,

except in particular colonies such as Tasmania (Cranfield and Inwood 2007; Inwood, Maxwell-Stewart, Oxley and
Stankovich 2015).

Thus, we see a variety of colonial experience. Colonization hindered the development of stature in Africa
although, towards the end of the colonial period, there was some recovery of heights reflecting the impact of
medical progress and, in British and French colonies, favourable public policy. In central and southeast Asia
countries retaining their independence fared better than their neighbours who were colonized. The settler colonies
were able to realize good health and impressive stature, but there was considerable inequality and for the most part
stature did not increase as might be expected given the fast rate of income growth. The diversity of experience of
stature under colonialism reflects the diversity of the European colonists and the overseas territories into which they
expanded in the eighteenth and nineteenth centuries.


1. The Introduction to this volume discusses the definition and limitations of this indicator.

2. Another limitation is that stature captures direct or short-term effects rather than long-term consequences such
as institutional changes or educational investments, which elsewhere in the volume are argued to be important.

3. The Introduction and Baten and Blum (2012, 2014) provide more detail.

4. Roy (Chapter 8 in this volume) mentions the possibility that nutritional culture also play a role.


Baten, J. and Blum, M. (2012), ‘Growing Tall but Unequal: New Findings and New Background Evidence on
Anthropometric Welfare in 156 Countries, 1810–1989’, Economic History of Developing Regions 27 (sup. 1),

Baten, J. and Blum, M. (2014), ‘Why are you Tall while Others are Short? Agricultural Production and other
Proximate Determinants of Global Heights’, European Review of Economic History 18 (2), 144–65.

Brennan, L., McDonald, J. and Shlomowitz, R. (1994), ‘Trends in the Economic Well-being of South Indians under
British Rule: the Anthropometric Evidence, Explorations in Economic History 31 (2), 225–60.

Cogneau, D. and Rouanet, L. (2011), ‘Living Conditions in Côte d’Ivoire and Ghana, 1925–1985: What do Survey
Data on Height Stature Tell Us?’, Economic History of Developing Regions 26 (2), 55–82.

Cranfield, J. and Inwood, K. (2007), ‘The Great Transformation: a Long-run Perspective on Physical Well-being in
Canada’, Economics and Human Biology 5(2), 204–28.

Cranfield, J. and Inwood, K. (2015a), ‘A Tale of Two Armies: the Stature of Australian and Canadian Soldiers in
World War One’, Australian Economic History Review 50 (2), 212–33.

Cranfield, J. and Inwood, K. (2015b), ‘Genes, Class or Culture? French–English Height Differences in Canada’, in
P. Baskerville and K. Inwood (eds.), Lives in Transition: Longitudinal Research from Historical Sources, McGill-
Queens University Press, 231–53.

Ferguson, N. (2003), Empire: the Rise and Demise of the British World Order and the Lessons for Global Power,
New York: Basic Books.

Frankema, E. and van Waijenburg, M. V. (2012), ‘Structural Impediments to African Growth? New Evidence from
Real Wages in British Africa, 1880–1965’, The Journal of Economic History 72 (04), 895–926.

Huillery, E. (2014), ‘The Black Man’s Burden: the Cost of Colonization of French West Africa’, The Journal of
Economic History 74 (01), 1–38.

Inwood, K. and Masakure, O. (2013), ‘Poverty and Physical Well-being among the Coloured Population in South
Africa’, Economic History of Developing Regions 28 (2), 56–82.

Inwood, K., Maxwell-Stewart, H., Oxley, D. and Stankovich, J. (2015), ‘Growing Incomes, Growing People in
Nineteenth-century Tasmania’, Australian Economic History Review 55 (2), 187–211.

Inwood, K., Oxley, L. and Roberts, E. (2010), ‘Was New Zealand the Land of Milk and Honey? New Evidence on
New Zealand Living Standards’, Australian Economic History Review 50(3), 262–83.

Inwood, K., Oxley, L. and Roberts, E. (2015), ‘Physical Well-being and Ethnic Inequality in New Zealand Prisons,
1840–1975’, History of the Family 20 (2), 250–70.

Moradi, A. (2009), ‘Towards an Objective Account of Nutrition and Health in Colonial Kenya: a Study of Stature in
African Army Recruits and Civilians, 1880–1980’, The Journal of Economic History 69 (03), 719–54.

Sender, J. and Smith, S. (1986), The Development of Capitalism in Africa, London: Methuen.


Did brain-drain from India cause
underdevelopment? Numeracy of Indian migrants

and the Indian population, seventeenth to
twentieth century

Joerg Baten

Brain-drain is a crucial economic problem of many countries today. If the most educated and entrepreneurial people
leave their country, the remaining population will be less likely to achieve rapid development and growth. For
example, in the late twentieth century many Europeans with university education migrated to the US, as skill premia
were substantially higher there (see the review in Stolz and Baten 2012). For high-mortality countries in Africa, the
recruitment of medical doctors has been severely criticized, up to the point that this recruitment activity was
suggested to be treated as a criminal case.

Was brain-drain also a development obstacle for poor countries in the nineteenth century? One candidate for
such an effect could be India, as between 200,000 and 600,000 Indians emigrated every year between 1870 and 1930
(Roy 2000: 290). Within the British colonial Empire, Indian agricultural labourers and artisans were recruited to
work in plantations and mines in other parts, such as Mauritius, South Africa, the Pacific and the Caribbean. How
educated were these migrants? Was there brain-drain from India? In Figure H8.1, we see the basic numeracy of two
groups of emigrants and the total Indian population born in the 1830s and 1890s.1 In addition, some early estimates
of Indian numeracy are added to the Figure. The selectivity of migrants during this period was quite mixed. Those
who were recruited for Natal (in today’s South Africa) were typically slightly more numerate than the Indian
average, whereas indentured labourers recruited for the Fiji islands were initially less, later more numerate.2

Figure H8.1 Basic numeracy of Indian migrants and the Indian population, seventeenth to nineteenth century

Source: based on Baten and Fourie (2014);

Another interesting fact is the stagnation of Indian numeracy: between the period around 1700 and the mid-
nineteenth century, Indian numeracy values remained at around 30–40 per cent, which is relatively low in global
comparison. During the 1500–1800 period, Europe experienced a numeracy revolution, growing from around 50 per
cent to over 90 per cent numeracy. It should be noted that the early estimates for India rely on very small numbers of
observations and have to be considered as being preliminary. Nevertheless, they appear not as unrealistic and the
fact that the evidence comes from very difficult institutional contexts, but still yields similar levels, is reconfirming.
The earliest estimates are based on inquisition court registers.3 In the period around 1700 slaves were brought to
South Africa, and the census-type registers in Sri Lanka also confirm the picture of stagnating human capital.
Finally, the wage evidence presented by Roy in this volume is also compatible with a long-run stagnation of
numeracy if we assume that it tends to correlate with wages. This finding has potentially large implications for
understanding the issue of competitiveness of the Indian economy with Europe after the transport costs had begun to
fall in the nineteenth century.

Returning to our initial question of migrant selectivity, the evidence is also mixed for the early forced migration
to South Africa. In addition, an important impact of brain-drain is also less likely, because the majority of Indian
labour migrants returned to their home country (Roy 2000). In a similar vein, the number of around 200,000–
600,000 per year might seem large, but it has to be taken into account that South Asia had between 250 million
(around 1880) and 340 million inhabitants (around 1930, see Roy 2000: 283). In sum, brain-drain was probably not

a major issue for India. However, the stagnation of numeracy in the early modern period and during the first period
of British colonization might have been a major development obstacle.


1. See the Introduction to this volume on the method.

2. Regional composition also plays a role: migrants to Natal came more often from coastal districts and cities in
the south. In addition, Natal issued a law about language and wealth requirements of immigrants in 1897 (Daniels
1995: 40).

3. Juif and Baten 2013 suggested an adjustment for inquisition source bias.


Baten, J. and Fourie, J. (2014), ‘Numeracy of Africans, Asians, and Europeans during the Early Modern Period:
New Evidence from Cape Colony Court Registers’, Economic History Review 68 (2), 632–56.

Daniels, R. (1995), ‘The Growth of Restrictive Immigrant Restrictions in the Colonies of Settlement’, in R. Cohen
(ed.), The Cambridge Survey of World Migration, Cambridge University Press, 39–44.

Juif, D. and Baten, J. (2013), ‘On the Human Capital of “Inca” Indios Before and After the Spanish Conquest. Was
there a “Pre-colonial Legacy”?’, Explorations in Economic History 50 (2), 227–41.

Roy, T. (2000), The Economic History of India 1857–1947, Delhi: Oxford University Press.

Stolz, Y. and Baten, J. (2012), ‘Brain Drain in the Age of Mass Migration: Does Relative Inequality Explain
Migrant Selectivity?’, Explorations in Economic History 49, 205–20.


Southeast Asia and Australia/New Zealand

Martin Shanahan

Some of the countries included in this chapter present the highest living standards in the world (Australia, New
Zealand and Singapore), while others stand as the poorest (Papua New Guinea and Timor-Leste). It also includes
several middle-ranked countries that even half a century ago were considered to be ‘developing’ (Malaysia,
Thailand, Indonesia), and others that remain in that category (Philippines, Vietnam, Laos, Cambodia). The chapter
includes countries that, in the past century, have transformed their societies, over-thrown colonialism, endured wars
and invasions and undergone extensive economic change, and others that have developed in comparative peace. The
diversity of economic and social conditions in this region, and the problems and opportunities these countries face,
serve as a microcosm of the issues facing many countries around the globe.

For most observers, a distinguishing feature of this region has been the rapid economic transformation of a
select handful of Asian ‘tigers’ in the second half of the twentieth century. Remarkable though these changes were,
it is worth recalling that all of the nations in this chapter possess deep social and cultural origins; many with
foundations in long existent and ancient civilizations that flourished centuries ago. A second factor shaping the
economies of this region has been their histories of turbulent, often violent, political, institutional and social change.
In some countries this began with the domination of European nations, especially after 1800, and continued in
different forms until as late as the beginning of the twenty-first century. The consequences of colonial rule and in
some cases war, and struggles for independence, still influence economic attitudes and policies of these countries.

A central theme running through this chapter is the importance of trade and its impact on living standards.
Many of the countries of Southeast Asia have a long tradition of trading with others. The marked rise in gross
domestic product (GDP) per capita, life expectancy and heights (all of which are indicators of improving material
well-being) after the Second World War reflect the importance of trade for a country’s living standards. A second
theme that emerges is the need for institutional and political stability, and an absence of violence, to advance
economic outcomes. Countries with the lowest levels of violence clearly demonstrate higher material outcomes, and
those most recently scarred by war lag behind those that have had more time to rebuild. Finally, it is worth reflecting
on how economic improvement can be self-reinforcing; populations whose living standards improve devote more
resources to education, and enjoy a longer life expectancy. In this respect, the economic histories of Southeast Asian
countries provide a significant body of evidence and a range of outcomes.

Geography and latitude
Geographically, it is convenient to cluster the area under discussion into three main regions: mainland Southeast
Asia (Cambodia, Laos, Myanmar, Malaysia and Singapore); Australasia (which includes Australia and New
Zealand); and those island nations that lie essentially between the two sub-regions (Timor-Leste, Indonesia, Papua
New Guinea and the Philippines). Historically and culturally, three of these last four countries are typically viewed
as part of Southeast Asia, while the fourth, Papua New Guinea, is more aligned with the Pacific Islands. The land
masses, population size and density of inhabitants differ greatly. At one extreme, the city-state of Singapore, home
to 5 million people, is around 700 square kilometres in size; while the land mass of Australia, at almost 7.7 million
square kilometres, hosts 23 million. The population of Timor-Leste, the newest and smallest country, contains fewer
than 1.2 million people; Indonesia, its adjoining neighbour, has a population of more than 250 million.

The geographical region covered here stretches over seventy-five degrees of latitude, from northern Myanmar
to the south island of New Zealand, and through eighty-six degrees of longitude. It contains deserts and tropical
forest, marsh-lands and stony desert, rolling plains and snow-covered mountains.

Mainland Southeast Asia is heavily shaped by north–south basins surrounding the Irrawaddy, Salween, Chao
Phraya, Mekong and Red (Hong) rivers. Mountain ranges such as the Truong Son and other high ground then
separate regions such as Thailand and Burma. The physical contrast is thus typically between low flat regions along
riverine and alluvial plains, and the uplands; a distinction that also identifies different communities. A single river,
the Mekong, influences large parts of Vietnam, Burma, Laos, Thailand and Cambodia. While the Thai-Malay
peninsula and the continent of Australia are geologically stable, the island bands of Indonesia, Papua New Guinea
and New Zealand are all in areas of volcanic activity.

The countries of Southeast Asia and Australasia occupy around 8 per cent of the world land mass, but receive
around 15 per cent of the world’s renewable water resources. This water, in the form of rainfall, rivers and surface
water, is unequally distributed, as are the approximately 660 million people (just under 10 per cent of world
population as measured in 2013). This large variation in population density, land forms, soil fertility, water
availability and climate also means that the type of plant-life and agricultural forms also vary. The types of
agriculture that are currently supported range from dairy farming in New Zealand, through open low-density cattle
and sheep farming and cereal cropping in Australia, to plantations in Indonesia and Malaysia and intensively farmed
rice fields in parts of the Philippines, Burma and Vietnam.

The influence and mix of cultures in Southeast Asia is also evident in the mix of religions and governance
found across the region. India influenced Burma, Thailand, Cambodia and Laos, and the mixture of Hindu and
Buddhist traditions shaped their institutions and supported a semi-Divine monarchy. The Vietnamese, by contrast,
were influenced by the Chinese and Confucian values. Islam, dominant in Indonesia, parts of Malaysia and many
coastal areas is evidence of the interaction of traders with the Middle East. The Philippines, whose Islamic
influences were also influenced by traders, were to be dominated by Christianity only after the arrival of the Spanish
in the sixteenth century (on the early history of this world region before 1500, see Highlight Chapter 9.1).

The pre-colonial period 1500–1800
While the period before 1500 saw the rise and fall of empires, the upheavals of wars and peaceful settlements and
the continuation of long-distance trade, as well as the usual natural disasters and local change, it was, in comparison
to the events of the next 300 years, a period of relative stability.

Before the arrival of the Europeans, the people, empires, and cultures of Southeast Asia comprised a complex
mixture of simple and sophisticated societies. The difference in standard of living between the majority of
subsistence farmers and elite rulers was great; as was the mix of languages and religions. While peasant farming
predominated, there was a small administrative and religious elite in some societies as well as groups of artisans and
traders; there was no real middle-class. In short, it was not that dissimilar to the European society of the same
period. Only in Australia, and to a lesser extent New Zealand and Papua New Guinea, were the levels of technology,
governance, property rights and institutions so different as to be almost unrecognizable for Europeans when they
were first encountered.

Maritime Europeans were already familiar with the commercial trading ports such as Cambay (in Gujarat,
India), Chittagong (Bengal), Pegu (Lower Burma), Melaka (Malaysian Peninsula), Palembang (Sumatra) and Macao
(China). For their locations and the centres of spice production, see Map 9.1. The Europeans’ increasing contact
with these and other trading regions over the next centuries began slowly, and its effect was most likely confined to
the port regions and hinterlands. Even as the Portuguese began to build a chain of fortifications to the Spice Islands
in the sixteenth century, in an ultimately failed attempt to monopolize the spice trade, the majority of the indigenous
populations would have been comparatively unaffected. The quantity of spices traded via the European controlled
routes in the sixteenth century grew comparatively slowly and does not appear to have greatly differed from the
amounts traded the century before.

Map 9.1 Trade in Southeast Asia during the seventeenth and early eighteenth century

Source: see map 1.1.

While trade quantities increased slowly up to the eighteenth century, or even decreased slightly in the case of
some commodities like pepper, the doctrine of mercantilism resulted in a significant expansion of European interests
competing to capture control of trade with the ‘Far East’. Ultimately, mercantilism saw national interests aligned
with trade, so that state power was enhanced through the accumulation of precious metals and trade surpluses. Just
as the Portuguese increased their interests in the sixteenth century, the Spanish also began their colonization and
religious conversion of much of the Philippines. Despite their early dominance, and in their explorations, the
probable European discovery of Papua, by the seventeenth century Portuguese interests were being eclipsed by the
Dutch. The Dutch East India Company focused particularly around Malacca and Batavia. The Dutch discoveries of
Australia and New Zealand in the seventeenth century were also an indirect consequence of their efforts to find trade
routes to the Spice Islands. It was not until the eighteenth century that the British, having established their interest in
India via the British East India Company, turned their attention to colonizing Penang and Singapore. Figure 9.1
presents one dimension of this trade, an estimate of the tons of pepper exported from Southeast Asia from 1500 to

Figure 9.1 Southeast Asian pepper exports, 1500–1790 (tons)

Source: based on Bulbeck et al. (1998: table 3.7), cited in Findlay and O’Rourke (2007: 203, 282).

Despite these expanding trade links with European interests, it is also true that for the majority of the
populations in each country, there was comparatively little interaction with Europeans. Some of this was simply
because many people lived away from the ports and main points of contact. It was also because, even after European
interests had settled in regions for decades or even centuries (as with the Dutch in Java) they had comparatively little
interest in local affairs. The three hundred years after 1500 in many ways saw the continuance of traditional social
routines and relationships for the majority of people. For most, life was still hard, with subsistence level agriculture,
fishing and, in less developed civilizations, hunting and gathering. Typically a country’s lowlands were the regions
most connected to society; the uplands were less inhabited and far less connected, socially or economically to
settlements. Some countries had dominant ethnic groups; Vietnamese in Vietnam; Khmers in Cambodia; the Thais
in Thailand. Others, including Burma and the maritime countries, had numerous ethnic populations. In further-flung
regions, such as parts of the Philippines, the outer Indonesian islands, Australia, Papua New Guinea and New
Zealand, there lived numerous tribes who descended from the earliest inhabitants of those regions.

New imperialism and the colonial period
The transformation of ideas that saw European nations shift from mercantilism to empire building occurred across
the eighteenth and nineteenth centuries. In Europe, war and industrial transformation had reshaped attitudes and
capabilities. For the rulers in Southeast Asia, this meant increasing pressure on their negotiations, treaties and other
forms of compromise with European interests.

For example, the eighteenth century saw Burmese rulers, whose country had not previously been of particular
interest to European traders, seek to maintain their traditional influence in the western areas of Assam, Manipur and
Arakan. Pressing them, however, was the British East India Company, which was expanding its interests eastwards
over the same territory. Over the next sixty years, diplomacy, raids, treaties and compromises continued until, after
three successful wars, Britain proclaimed control over most of Burma. In Vietnam, it was the French who invaded in
1850, ostensibly to protect religious missionaries but not unaware of the imperial gains to be had from possession.
They also took possession of a weakened Cambodia. While Thailand remained a buffer between British and French
interests, and through skilful diplomacy was never colonized, the French also took control of Laos in the late
nineteenth century. In Indonesia, the influence of the Dutch East India Company had been transferred to the Dutch
government and its influence was to spread across the Indonesian archipelago and New Guinea, with a small
neglected Portuguese colony in Timor-Leste. The Spanish had taken possession of the Philippines much earlier, in
the sixteenth century, driven by the desire to convert but not unaware of potential economic gain. Their hold was
frequently challenged with some islands and their inhabitants resisting conquest and conversion for centuries.
Ultimately the Spanish lost possession to the US in 1898. By the end of the nineteenth century the British had taken
over effective possession of the Malay Peninsula from the Dutch through their expanding settlements in Singapore,
Penang, Malacca and various provinces. They had also taken possession of Australia and New Zealand in the late
eighteenth and early nineteenth centuries.

While the effect of this imperialism was to transform the social, political and cultural experiences of these
countries, it also transformed their economies. One of the most important shifts was in the production of
commodities. The creation of the dairy farms of New Zealand; the sheep farms and wheat fields of Australia; the
rubber plantations of Malaysia, Java, Sumatra, Vietnam and Cambodia; the tin mining of Malaya; the rice fields of
the Mekong Delta, Menam River (Thailand) and Irrawaddy River delta (Burma), were a response to powerful
market demands. In aggregate, millions of acres of land and millions of people were drawn into supplying markets
around the world with commodities of all kinds. Production techniques changed. Large-scale production required
more intensive use of factor inputs. Much of the capital and finance for this transformation was supplied from
outside Southeast Asia and Oceania while labour too was sometimes imported, mostly from other parts of Southeast
Asia, to augment local workers. In some cases only land and labour were the locally supplied factors of production.

The period between the Napoleonic wars and the First World War also saw a revolution in transportation
technology (from sail to steam; animal drawn carts to railway) and communication. The resulting fall in costs
enabled the expansion of trade from regions that from a North Atlantic perspective were at the ‘periphery’ of global
finance and industrialization. In exchange for manufactured goods (used in both production and consumption) the
periphery supplied many of the raw commodities and foodstuffs sought by industrialized countries whose affluence
and middle-classes were growing rapidly. The opening of the Suez Canal in 1869 served to lower costs further

between Europe and Southeast Asia and strengthened the role of trading ports and especially Singapore. Map 9.2
shows some of the main export products of the Southeast Asian countries c. 1920.

Map 9.2 Regional economic specialization and main export products in Southeast Asia around 1920

Source: see map 1.1.

In addition to the transformation in production, and the transportation of goods around the world, the nineteenth
century also saw an increase in migration. While large numbers of people moved from the old world to the new
(including Australia and New Zealand, especially after the discovery of gold) there were also movements of people

through Southeast Asia. For example, many Chinese moved rapidly into Singapore shortly after its founding in
1819. The presence of the Chinese and their business skills were encouraged by the French in Vietnam, Cambodia
and Laos; the Chinese also supplied much of the labour for the tin mines in Malaya. Other groups, such as Indians,
moved in numbers into Burma and Malaysia-Singapore.

One legacy of colonialism was the shaping and defining of many of today’s national boundaries. Another was
the standardization of record keeping, and internationally recognised (to European eyes) laws, administrative
processes and property rights. Colonialism also starkly increased local populations’ awareness of the ‘outside
world’, as they had less control over their own affairs. It also changed the aspirations of the local elites as they grew
aware of the need for a more ‘Western’ education to access positions associated with the growing trade economy
and political administration. Although the economic consequences of improved trade meant increases in the
measured production and consumption of goods, it did not necessarily translate into a more equitable distribution of
resources for all members of the country. The political consequences of this differed significantly between regions.
Increased market access could advance growth, but it could also increase the transmission of external economic
shocks. The nature of these impacts, however, differed between regions.

In Australia (but less so in New Zealand, because of the Treaty of Waitangi) the original inhabitants were
ignored, marginalized or killed. The majority of the benefits of global market expansion were captured by the
European colonists. In the nineteenth century the result was to raise the measured standard of living of the colonists
in both countries to among the highest in the world. Even by the early twentieth century, and after significant
immigration, there was, compared to many Southeast Asian countries, a relatively peaceful political transformation
from being a series of colonies to becoming the separate nations of Australia (in 1901) and New Zealand (as a
‘Dominion’ in 1907 and fully in 1947), as the mostly European immigrants gained independence from the British

In Southeast Asia, by contrast, the path to independent nation status, and a political, social and economic
system controlled by native inhabitants was more difficult. The size of local populations and the disenfranchisement
of most natives meant any transition to a different political system would require colonial powers to transfer control
to non-European local inhabitants. The late nineteenth century and especially the First World War impacted on the
perspectives of nationalists in many Southeast Asian countries. The tensions over who benefited from economic
growth, colonial attitudes to local people and growing levels of education (if only among elite local members) saw
the emergence of increased aspirations for independence. The 1930s depression and subsequent retreat from global
trade had significant consequences for those supplying commodity markets – especially those with the least means.
Burma and parts of Indonesia were badly affected. As in Europe, economic pressure could produce political change.
In Thailand, for example, the deficits caused by the depression saw a military coup to replace the absolute monarch.
The Japanese conquests during the Second World War further reinforced the resolve of local people for
independence, while demonstrating that European authority was not unsurmountable.

Each country, however, followed a different path to ultimate independence. Thailand negotiated its fate with
multiple European interests and, unique to Southeast Asia, managed to avoid major colonial interventions. Burma
(now Myanmar) negotiated its independence from Britain in 1948, but was ruled by a military dictatorship from
1962 to 2011. Malaysia negotiated independence from the British in 1957, although not without the violence of the
Malayan Emergency that was then followed by the initial union and separation from Singapore (in 1965). The
Philippines’ transition to independence under the Americans was seen as relatively inevitable, but did not occur until

1946, and even then with a remaining strong American presence. Vietnam only gained independence after extended
bloody wars against a series of foreign invaders including the Japanese, French, Americans and their allies, that
lasted from 1940 to 1975 and extended into border wars with neighbouring countries for many years. Cambodia
gained independence from France in 1953, but was involved in the Vietnam War, and later endured a genocidal
regime from 1975–91. Indonesia needed four years of fighting with the Dutch (1945–49) before gaining
independence. Laos, too, gained its independence from France between 1945 and 1949 but endured decades of civil
war thereafter. Papua New Guinea ceased to be administered by Australia in only 1975, while Timor-Leste was
finally released from Portuguese interests in 1975 but endured significant destruction by the Indonesians (who had
invaded in 1973) before achieving independence in 2002. Table 9.1 provides one representation of this turbulence,
with a nation’s form of governance being scored on a scale from minus ten, representing absolute autocracy, to plus
ten, representing full democracy. In contrast to many of the other countries of Southeast Asia, it reveals that
Australia and New Zealand had long histories of stable and democratic government institutions while several other
countries in this region endured institutions well below full democracy. With the exceptions of Laos and Myanmar,
institutions and processes in these other nations tended to improve, albeit sometimes slowly, in the second half of
the twentieth century. These varying paths to independence, the significant differences in human and capital
destruction endured in each country and the different social and economic responses to these challenges, also serve
to explain some of the variation in living standards that emerged after the Second World War.

Table 9.1 Polity2 in Southeast Asia (autocracy–democracy on a −10 to 10 scale)

1900 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Australia 10 10 10 10 10 10 10 10 10 10 10 10 10 10


10 10 10 10 10 10 10 10 10 10 10 10 10 10


4 4 4 4 4 4 4 4

Cambodia −9 −9 −9 −7 1 1 2 2 2

Indonesia 6 8 8

Laos 2 −1 −7 −7 −7 −7 −7 −7 −7 −7

Malaysia 10 10 1 4 4 4 4 3 3 3 6

Myanmar 8 8 8 −7 −7 −6 −8 −8 −7 −7 −7 −8 −6

Philippines 5 5 5 5 2 -9 -9 -6 8 8 8 8 8

Singapore 7 −2 −2 −2 −2 −2 −2 −2 −2 −2 −2

Thailand −10 −3 −3 −7 −7 2 3 2 2 3 9 9 9 4

Timor- 6 7


Vietnam −9 −8 −8 −7 −7 −7 −7 −7 −7 −7 −7 −7

Source: Calculated from Marshall, Jaggers, and Gurr (2011),

Notes: Autocracy–democracy index: −10 (total autocracy), +10 (total democracy). Australia and New Zealand
exhibit high levels of democracy from the 1850s, while Thailand was originally an absolute monarchy. Large
changes in political governance after 1950 reflect the variety of paths followed post-colonial rule.

Post Second World War
While the individual countries of Southeast Asia and Oceania found themselves in quite different situations after the
Second World War, globally the period was to be marked by a return to more open trade and international
cooperation. Despite the fact that wars and civil strife were significant elements of Southeast Asia (in particular the
areas of ‘Indochina’ covering Vietnam, Cambodia and Laos), there was, in other regions, considerable improvement
to trade and living standards. This is perhaps less surprising when one considers the long legacy of international
trade that existed throughout Southeast Asia from the preceding centuries. It is also worth noting that, with the
exception of Australia, New Zealand and the Philippines, earlier European colonial ties did not appear to have much
influence on the direction of trade links.

By the 1960s, Singapore was emerging as one of the four ‘Asian Tigers’ along with Hong Kong, South Korea
and Taiwan. Between 1965 and 1995, growth rates for these four economies averaged around 6 per cent per annum,
transforming the living standards of their populations. Also in the group of High Performing Asian Economies
(HPAE) were Indonesia, Malaysia and Thailand. Of particular interest was their ability to achieve rapid growth, with
mostly equitable outcomes, while using quite interventionist government policies. Their unique growth trajectories
prompted a range of explanations. Researchers identified several factors including: trade openness (and especially
export push policies), financial stability (both macroeconomic and in the banking sector) and international
cooperation (particularly in an increasingly globalized world), technology, increased physical and human capital per
worker, improved health and education, demographic changes that increased labour supply but also demand for
consumer goods, a shift toward manufacturing, cheap energy and interventionist governments. Together these
created a ‘golden age’ of growth. Countries that were able to attract investment to utilize their plentiful, cheap and
increasingly educated labour and embrace trade openness were able to grow. A closer focus on the individual
HPAEs reveals a more diverse story.

Indonesia’s post-1960 economic improvement was quite remarkable when one considers how few indigenous
Indonesians in the 1950s had received a formal education under Dutch colonial policies. Political, social and
military instability in the early 1960s had resulted in a military coup in 1965. The following forty years, however,
saw a military backed government focus relentlessly on uniting and developing the ethnically and culturally diverse
archipelago of several thousand islands, using anti-communist, pro-market policies. The sheer size of the population
and the diversity of the country meant even small gains would be difficult but, if achieved, that many millions of
lives were improved.

Remarkable too was Malaysia’s economic development, given its troubled beginnings in the early 1960s and
the ethnic partitions that were inherited from centuries of segmented economic development. With an extended
period of political stability, however, the government developed a series of policies focused on economic growth. It
followed a relatively open economic policy and encouraged the influx of foreign capital. A series of policies and
economic targets, such as the New Economic Policy, import-substitution industrialization in heavy industry policy,
and the National Development policy, combined with a massive shift to enhance access to education in the mid-
1960s, resulted in large advances to Malaysians’ standard of living.

In the case of Thailand, the growth path was less straightforward. Significant investment in education in the
1930s, and again in the 1950s, laid the basis for economic growth, as did a liberal approach to trade and investment.

Manufacturing, which was given impetus by American requirements for the Korean War and Thailand’s ability to
supply primary products, also served as the platform for the post-1960s increase in living standards. Nonetheless, the
country’s proximity to warring states and its own political instability saw multiple devaluations of the currency over
several decades. While periods in the late 1980s saw large growth, other decades saw periods of currency
speculation, high interest rates and, at different times, a lack of foreign capital.

In the region, the Association of Southeast Asian Nations (ASEAN) was formed in 1967. Initially including
only Indonesia, Malaysia, the Philippines, Singapore and Thailand it gradually expanded, as political tensions and
differences eased, to include Brunei, Myanmar, Cambodia, Laos and Vietnam. Papua New Guinea currently has
observer status and Timor-Leste has applied for membership. Other regional interests, including Australia and New
Zealand, are part of the associated ASEAN Regional Forum which now includes twenty-seven countries.

This period of industrialization and growth also saw a massive shift of people from the countryside to the cities.
This had occurred early in the case of Singapore, Australia and New Zealand, where half the population lived in
cities by 1900. By the 1970s the figure was 80 to 100 per cent (Singapore). By contrast, while millions of people
have shifted from the country to the cities since the 1960s, especially in Indonesia, the Philippines, Thailand,
Vietnam and Malaysia, only in the 1990s did the percentage living in urban settings reach 50 per cent, and only in
the Philippines and Malaysia. Population size matters in these comparisons. While over 100 million people live in
cities in Indonesia, today this still represents less than 50 per cent of their population.

By comparison, the poorest countries of Papua New Guinea and Timor-Leste also have the lowest rates of
urbanization. This reflects their lack of the classic pull factor – industrialization – and the movement of people in
response to work opportunities. While the move into cities is associated with increased material wealth –
industrialization creates more wealth than subsistence farming – it also produces large concentrations of unskilled
labour. Cheap labour is critical to basic, large-scale manufacturing but it is also associated with the difficult social
issues of poverty, overcrowding, crime and substandard infrastructure. Thus while the shift towards increased
urbanization, industrialization and improved aggregate material wealth is a form of catching up with the living
standards of more developed economies, it brings with it some of the problems of overly rapid and unconstrained

Some aspects of the economic development of these countries are captured in the figures and tables that follow.
While none of these figures can reveal all the critical elements impacting on economic growth, they do highlight
critical points of similarity and difference in the growth paths and economic outcomes of this widely diverse group
of countries.

The long-term transformation of the living standards of these countries can be expressed in a number of ways.
The most common measure, GDP per capita, is represented in Figure 9.2. The top panel in Figure 9.2 reveals the
high living standards of Australia and New Zealand, throughout the nineteenth and twentieth century. It also shows
the rapid improvement to Singapore’s material standard of living. One of the four Asian Tiger economies, its
spectacular increase in per capita GDP began in the 1960s and has increased to a level that equals (and since 2005
exceeds) that of Australia and New Zealand. Far less spectacular, but also significant, are the improvements in
Malaysia and Thailand; their per capita GDPs are now around those of Singapore in the 1970s. The lower panel
reveals their growth since the 1960s, as well as the later improvement in Indonesia and the more disappointing
increase in the Philippines over the same period. By comparison, the measured standards of living in Laos, Vietnam
and Myanmar are only now approaching those of Singapore when it began its take-off over half a century ago.

Collectively, however, all of these improvements have meant a transformation in the lives and opportunities of
millions of people, and at a rate that was undreamed of a generation ago.

Figure 9.2 GDP per capita in Southeast Asia, 1900–2000

Source:; Maddison Project:

The 1997–98 Asian financial crisis provided a check to both the growth rates of many Southeast Asian
countries and their populations’ living standards. Caused by a combination of excess borrowing, declining returns
and overheating economies, the shock saw growth rates drop dramatically.

National responses to the crisis diverged. Politically, the shock had a significant impact in Indonesia, for
example, where many companies were unable to repay their foreign borrowings and several banks collapsed. These
events helped precipitate the fall of the government and saw a shift in economic policy, with cuts to projects
financed by the government and many import tariffs. Malaysia, on the other hand, responded to the crisis by
intervening in its markets, fixing its exchange rate and subsequently expanding government expenditures and
refusing aid from the International Monetary Fund (IMF). In contrast, Thailand restricted capital outflows and
quickly sought IMF assistance.

While national growth rates subsequently improved, the crisis is now seen as marking a ‘turning point’ in the
region, with the slowing of Japan and the emergence of China, and to a lesser extent India, as new sources of
growth. While both China and India had been improving their economic performance for several years before the
crisis, the subsequent dominance of China – both globally and as a hub to many of its neighbours’ supply chains –
has been marked by many as dating from this event. Subsequent to the Asian crisis there was a rapid expansion in
bilateral trade agreements, regional capital markets and macroeconomic reforms, as well as significant currency
integration. These all enhanced economic growth.

Much of this economic pressure served to integrate the economics of Southeast Asia and Australasia even
further. While the mainland Southeast Asian countries have been linked to China both in the process of
manufacturing and as importers of China’s manufactured goods, Australia and New Zealand have been mostly
exporting commodities and agricultural products.

In contrast, the poorest countries in this comparison, Timor-Leste, Papua New Guinea, Myanmar, Cambodia
and Laos, remain minimally engaged in trade, often having little to export to others. The reasons behind this vary,
although the impact of war and civil unrest are common threads.

Timor-Leste for example, only separated from Indonesia in 2002 and immediately faced the challenge of
rebuilding the 70 per cent of homes and schools destroyed by the withdrawing Indonesians. Despite World Bank
estimates that countries require fifteen to thirty years to overcome post-conflict trauma, Timor-Leste has been laying
the foundations of education, health care, institution building and infrastructure for the past decade, despite
significant poverty. Oil reserves off its coast offer the possibility of an important future export commodity.
Nonetheless, on all measures, it remains extremely poor.

Self-governing since 1975, Papua New Guinea contains a large number of tradable commodities. Its
mountainous geography and tropical climate, fragmented tribal populations and the legacy of previous colonial
‘cargo cult’ development, have meant that it has not yet developed the level of economic, social or educational
infrastructure needed to advance living standards to those of middle-ranked countries.

Myanmar’s current levels of poverty and lack of economic progress reflects the impact of decades of violence,
military rule, martial law and civil unrest. In stark contrast to the HPAEs, there has been no sustained focus on
improving the living standards of the population but instead the nation has been consumed by the struggle between

people of different political and economic ideologies. The result has been the neglect of the basic human, social and
economic infrastructure required to advance individual living standards.

A similar, though even more violent, set of historical events explains Cambodia’s current levels of
impoverishment. After modest economic improvement in the early 1960s, Cambodia was drawn into the Vietnam
War. While the damage this caused was extensive, the destruction of the Khmer Rouge during the 1970s was the
complete antithesis of building factors associated with economic growth. The focus on creating collective
agriculture and a nationalized economy was, however, ultimately less destructive than the mass murder of all
individuals with any form of education (even including those who simply possessed reading glasses) that occurred
throughout the country over several years. After the fall of the Khmer Rouge in 1979, fighting continued at varying
intervals and with varying intensity for more than a decade. The result is that, even today, only agriculture, some
simple manufacturing, services, tourism and construction serve as the basis of the economy.

The post-Second World War history of Laos, like Cambodia, is inextricably tied to the Indochina Wars and
Vietnam. Like Cambodia, the wars resulted in massive destruction of natural and human resources over two
decades. Like Vietnam, the economy had also become greatly dependent on external (mainly American) investment
which was withdrawn when the Communists came to power in the mid-1970s. For several years a traditional
command-based economic system was adopted, although since the late 1980s this has been modified to permit
increased international trade and more private sector activity. Nonetheless, agriculture and tourism remain critical to
the economy while industrial development plays a relatively minor role in advancing living standards.

The economic consequences of fighting the Indochina wars for over three decades, as well as other border
wars, has meant that Vietnam has had far less time than other countries to rebuild. Not only did the human and
capital destruction of war need to be addressed, the massive economic distortions caused by a war economy, high
levels of aid (in the 1950s and 1960s) and post-war, economic embargoes all created barriers to advancing living
standards. As with Laos and Cambodia, a centrally planned economy has dominated, although since 1986 Vietnam
has pursued a mixed strategy of socialist planning and market signals. The result has been an increased level of
economic growth as the nation has combined private sector growth with planned targets and infrastructure. On
several of the indicators described below, Vietnam now outstrips Laos and Cambodia. Vietnam joined the World
Trade Organization (WTO) in 2007.

The Philippines, although not suffering the same extremely low average living standards as the above countries,
has also struggled with poverty and extreme differences between rich and poor. Before the Second World War
government expenditure on education was higher than in several other Southeast Asian countries. For several
decades following the Second World War it followed a relatively open trade policy, but with a policy of import
substitution, rather than export growth. Heavy government regulation combined with corruption also discouraged
external investment. Subsistence agriculture and lowered levels of investment in education slowed improvements to
living standards, while inequality and lack of investment in social infrastructure meant only relatively few areas of
export growth. In more recent years, while economic indicators have improved, the distribution of improvements to
living standards has remained a significant problem.

In addition to measures of GDP per capita, another way to represent improvements to living standards is by
examining the average height of the population. As discussed elsewhere in this book, the average height of the
population provides a measure of human well-being that summarizes the total set of factors – economic, social and
environmental – that bears down on individuals. The sensitivity of this measure to adversity (and plenty) is

remarkable. It is also possible to trace this measure further back in time than many other measures of living
standards. As Figure 9.3 reveals, the average height of male (white) Australians and New Zealanders has, for over
two centuries, far exceeded the average heights of males in other countries. (Data on male heights are more
numerous than female data in the historical record, as they are frequently collected at enlistment, imprisonment or
slave sale. Given the external food and disease environment generally impacts equally on men and women they are
taken as a reasonable measure of the whole population.) The record also shows some remarkable increases in
heights in recent years, as food supplies, medical treatment and the disease environment improved with GDP,
particularly in Thailand, Malaysia and, more steadily, in Indonesia. The height record can also reveal the impact of
deprivation and adversity. The steep decline in heights in the second half of the nineteenth century in Cambodia and
Myanmar, and to a lesser extent in Indonesia in the 1870s, are clearly evident, as are the large declines in Vietnam,
Myanmar and Cambodia heights in the second half of the twentieth century. The economic and social ravages of war
and civil disruption are ultimately reflected in the very stature of the population. Even the few available observations
on male heights in Papua New Guinea confirm that country’s ongoing difficulties with low living standards. In
contrast, the recent rapid increase in height among male Thais and Malaysians is consistent with a significant
improvement in economic and environmental health factors. The more recent improvement in the heights of males
in Laos, despite their current low living standards, is also cause for optimism, as it suggests that the basic elements
of food and health are being enjoyed by a significant portion of the population.

Figure 9.3 Male heights in Southeast Asia, 1800–2000
Note: the y-axes in the upper and lower panel have different minimum and maximum values.

Source: Baten and Blum (2012).

The ultimate measure of living standard for the individual, life expectancy, also responds to the factors that
impact on a person’s health and well-being. Like height, it not only reflects the full combination of factors that affect
the individual, but also the living conditions of their mothers prior to birth. Before the 1850s, average life

expectancy in many European countries was between 30 and 35 years old, a figure that was not achieved in the
Philippines even at the beginning of the twentieth century. In Indonesia average life expectancy was below 30 in the
1940s, and in Timor-Leste this was still the average life-expectancy in the 1950s. Figure 9.4 reveals the very rapid
improvement in life expectancy that occurred in many countries in the twentieth century. This has been a particular
dimension of living standards that has improved in Southeast Asia. In the mid-twentieth century, average life
expectancy at birth in Myanmar, Laos, Cambodia and Vietnam were the same as those in more developed nations in
the nineteenth century. As recently as the 1960s, average life expectancy at birth in Papua New Guinea and Timor-
Leste were equally low, at under 40 years of age, but both countries have exhibited rapid improvements in their
populations’ life expectancy in recent decades. Nonetheless, there are still clear gaps in life expectancy. More than a
decade of life expectancy separates infants born in Australia, New Zealand and Singapore from those born in
Thailand, the Philippines or Indonesia. Infants born in Cambodia or Timor-Leste face the prospect of lifetimes that
on average will be two decades shorter than their contemporaries in the wealthiest countries.

Figure 9.4 Average life expectancy at birth in Southeast Asia, 1900–2000
Note: the y-axes in the upper and lower panel have different minimum and maximum values.


Just as the closing gap in urbanization and per capita GDP means that more of these countries are encountering
the social problems that exist in more developed countries, so increasing longevity means they will, in the future,
face the social problems of an increasingly ageing population. In several cases, however, they will not have the time
or resources to develop the same levels of health and infrastructure support as the richest countries, suggesting a
potentially bleak outcome for many of the aged in the poorest countries.

A critical factor associated with average life expectancy and living standards now and in the future is education.
With the transformation of economic development, first from agriculture and commodity production to low-skill
industry and manufacturing, and in the second half of the twentieth century to high-skilled manufacturing, the
importance of education has increased continuously over the past two centuries. The response of many Southeast
Asian nations is represented in Figure 9.5 where the sharp increase in average years of education is clearly evident
in most countries, especially after the 1950s. Once again Australia and New Zealand are at the top of the graph.
While Singapore and Malaysia have been improving rapidly, the much slower improvement for Cambodia does not
bode well for their future. The average number of years of education in Vietnam (despite recent post-war
improvements), Laos and Myanmar are still less than half of those achieved by the leading countries.

Figure 9.5 Average years of education for people aged over 15 in Southeast Asia


Commitment and investment in education is one government policy that can be implemented relatively quickly,
even though the economic benefit of such investment may take decades to emerge. Even in the more developed
countries, it was only after the Second World War that larger proportions of the population began to undertake
tertiary education. While the first step in any education investment must be in basic and widespread primary
education, for several of the Southeast Asian countries in this study, the creation of larger numbers of highly
educated citizens is well within reach.

Many of the economies in this region changed significantly after the 1960s and have changed again in the past
decade. Improving their living standards initially via the production and export of labour-intensive, low-cost
manufactured goods, many of them achieved high rates of economic growth. More recently, a number of countries
have become part of regionally integrated supply chains with a focus on regional co-operation. Through the 1980s
and 1990s many of these economies imported capital, had current account deficits and faced pressure to depreciate
their currencies. Today, several export capital, have current account surpluses and their currencies are viewed by
some as undervalued. Not all, unfortunately, have prospered. Timor-Leste and Papua New Guinea, for example,
remain in need of continued external aid to supply their citizens with basic infrastructure.

While Australia, New Zealand and more recently Singapore, have enjoyed high living standards, even these
countries have had to adjust their economic settings to maintain those levels. In the case of Australia and New
Zealand, for example, the 1970s and 1980s were periods of significant economic adjustment. Tariff barriers, a long
time policy of Australia, were significantly lowered, and the exchange rate allowed to float. New Zealand undertook
substantial economic reform to lessen regulation. While these policies in many ways followed the trend initiated in
other parts of the developed Western world, they also facilitated a more international aspect to these countries’
economies and helped sustain their growth rates.

After the retreat from globalization between the First and Second World Wars, the second half of the twentieth
century saw trade openness again emerge as a critical factor advancing nations’ living standards. Countries that were
able to participate in trade, that produced goods the world wished to buy, and that developed their human and
physical infrastructure to engage with other countries, prospered. Table 9.2 provides one representation of this for
the nations of Southeast Asia and Australasia. It measures the value of exported goods, adjusted for population size.
The table shows Singapore (as a trading hub with high levels of re-exports), Australia, New Zealand and Malaysia in
a group of countries with high levels of exports. Their level of exports, and the fact that their relatively high export
levels per capita existed from the 1940s, place them in a different group from the nations of Indonesia, Thailand, the
Philippines, Laos or Cambodia. The table also suggests that Thailand has been rapidly improving its export
performance, while for Vietnam it took until the cessation of hostilities for it to increase exports. It has been rapidly
increasing per capita exports since the 1980s. Unfortunately, the per capita value of exports for Timor-Leste lies
well below those of other countries, although the rapid improvement that is seen in many of its Southeast Asian
neighbours since the 1970s raises hope for the future. For many of the nations of Southeast Asia, trade would appear
to be a critical element for their future well-being; a fact that their forebears many generations earlier would have

Table 9.2 Merchandise trade exports per head of population, 1950–2010

1950 1960 1970 1980 1990 2000 2010

Singapore 1.069 0.749 8.027 19.494 34.297 69.306

Australia 0.220 0.195 0.374 1.505 2.359 3.367 9.517

New Zealand 0.265 0.351 0.427 1.707 2.735 3.473 7.188

Malaysia 0.153 0.192 1.184 2.085 7.030

Thailand 0.017 0.016 0.021 0.145 0.423 1.139 2.827

Vietnam 0.005 0.006 0.037 0.190 0.831

Indonesia 0.009 0.009 0.149 0.143 0.317 0.674

Philippines 0.017 0.023 0.028 0.119 0.134 0.520 0.548

Cambodia 0.008 0.003 0.121 0.360

Papua New Guinea 0.042 0.342 0.313 0.404

Laos 0.277

Timor-Leste 0.000 0.000 0.000 0.000 0.000 0.015

Myanmar 0.008 0.004

Source: Exports calculated from WTO (2013), Value of merchandise trade and commercial services and
population from Mitchell (2007: table A1, pp. 10–14).

Note: Value of exports per person measured in $US (’000s) per person. Current prices.

Concluding remarks
A generation has passed since the end of the Second World War and while memories of struggles for independence
are still fresh in the minds of some citizens, for many born after 1960 their world is unrecognizable from that of their
parents. For several countries, the cities, health standards and educational expectations of their citizens are among
the highest in the world. The economic well-being of citizens in less developed countries, however, remains decades
behind, despite the technology of the internet allowing them to communicate ever more immediately with the rest of
the world.

Australia and New Zealand have achieved and maintained some of the highest living standards in the world for
over a century. By contrast, the changes that have occurred in Singapore and Malaysia and, to a lesser extent, the
Philippines, Indonesia and Thailand over the past half-century have been dramatic and far-reaching; from well
below the global average to above many other parts of the globe. The material standard of living enjoyed by the
citizens in these countries would have been unimaginable to earlier generations. Lagging behind this surge in
economic growth, but for different reasons, are the countries of Thailand, Vietnam, Cambodia and Laos; but even
here there has been great improvement, especially, in recent years, in Vietnam. The living conditions and economies
of Papua New Guinea, Myanmar and Timor-Leste, however, would still be familiar to an earlier generation, even if
the technology would not.

These countries include around 10 per cent of the world’s population. Changes to government policy that create
even small improvements to their populations’ standard of living, therefore, will impact on the lives, health and life
expectancy of millions of people. The diversity of growth paths in each country reflects a range of different
influences. Trade, war, peace, social and civil unrest, institutions, governance rules, geography, educational
opportunities; all have played a role. Fundamental building blocks to improving living standards are common:
peace, the opportunity to trade, good governance, property rights, markets, education and good health.
Understanding the history of these countries, the paths they have followed and the lessons they have to teach us, will
help many countries better address the challenges of the present and future.

Further reading

Asian Development Bank (2014), Country Reports, various issues,, accessed
September 2014.

Baten, J., Stegl, M. and van der Eng, P. (2013), ‘The Biological Standard of Living and Body Height in Colonial and
Post-colonial Indonesia, 1770–2000’, Journal of Bioeconomics 15 (2), 103–22. Provides long-run estimates of living
standards using human height as a key indicator.

Bellwood, P. (1992), ‘From Prehistory to c. 1500 CE’, in N. Tarling (ed.), The Cambridge History of Southeast Asia.
Vol. 1: From Early Times to c. 1800, Cambridge University Press.

Bolt, J. and van Zanden, J. L. (2013), ‘The First Update of the Maddison Project; Re-Estimating Growth Before
1820’, Maddison Project Working Paper 4.

Booth, A. (1991), ‘The Economic Development of Southeast Asia: 1870–1985’, Australian Economic History
Review 31 (1), 20–52. Provides a useful overview of the economic history of Southeast Asia over a critical time of
economic change.

Cameron, R. (1997), A Concise Economic History of the World. From Paleolithic Times to the Present, 3rd edn.,
Oxford University Press.

Drabble, J. H. and Booth, A. (2000), An Economic History of Malaysia c. 1800–1990: the Transition to Modern
Economic Growth, Palgrave Macmillan, Basingstoke.

Fforde, A. (2009), ‘History, and the Origins of Vietnam’s Post-War Economic Success’, Asian Survey 49 (3):

Hawke, G. R. (1985), The Making of New Zealand: an Economic History, Cambridge University Press. With a
strong focus on New Zealand post-1890, this provides a comprehensive overview of that country’s economic

Head, J. W. (2010), ‘The Asian Financial Crisis in Retrospect – Observations on Legal and Institutional Lessons
Learned after a Dozen Years’, East Asia Law Review 51 (31), 31–102.

Huang, Y., and Wang, B. (2011), ‘From the Asian Miracle to an Asian Century? Economic Transformation in the
2000s and Prospects for the 2010s’, Reserve Bank of Australia Conference,, accessed 20 September 2013.

International Monetary Fund (2014), Economic data, various countries,, accessed
September 2014.

Klein Goldewijk, K., Beusen, A. and Janssen, P. (2010), ‘Long Term Dynamic Modeling of Global Population and
Built-up Area in a Spatially Explicit Way, HYDE 3.1’, The Holocene 20 (4), 565–73.

Maddison, A. (2006), ‘Asia in the World Economy 1500–2030 AD’, Asian-Pacific Economic Literature, 20 (2),
1–37. Provides an essentially quantitative overview of Asian economic development.

McLean, I. W. (2012), Why Australia Prospered: the Shifting Sources of Economic Growth, Princeton University

Mokyr, J. (ed.) (2003), The Oxford Encyclopaedia of Economic History, Oxford University Press.

Montesano, M. J. (2009), ‘Revisiting the Rice Deltas and Reconsidering Modern Southeast Asia’s Economic
History’, Journal of Southeast Asian Studies 40: 417–29.

Organisation for Economic Cooperation and Development (OECD) (2014), country reports, various,, accessed September 2014.

Osborne, M. (2013), South East Asia. An Introductory History, 11th edn., Sydney: Allen and Unwin. An easily
accessible introduction to social and cultural history of Southeast Asia.

Page, J. (1994), ‘The East Asian Miracle: Four Lessons for Development Policy’, in S. Fischer and J. J. Rotemberg
(eds.), NBER Macroeconomics Annual, Vol. 9, Cambridge, MA: MIT Press, 219–82.

Prados de la Escosura, L. (2013), ‘World Human Development: 1870–2007’, Working Papers 0034, European
Historical Economics Society.

Shanahan, M. P. (2014), ‘Wealth and Welfare’, in S. Ville and G. Withers (ed.), The Cambridge Economic History
of Australia, Cambridge University Press, 489–510.

Slocomb, M. (2010), An Economic History of Cambodia in the Twentieth Century, Singapore: NUS Press.

Sugimoto, I. (2011), Economic Growth of Singapore in the Twentieth Century: Historical GDP Estimates and
Empirical Investigations, Singapore: World Scientific Books.

Tarling, N. (ed.) (1992), The Cambridge History of Southeast Asia, 2 Vols., Cambridge University Press. Still one of
the most comprehensive historical references for the majority of the countries discussed in this chapter.

United Nations (various issues), Demographic Yearbook,, accessed November 2013.

van Zanden, J. L. and Marks, D. (2012), An Economic History of Indonesia: 1800–2010, Routledge Studies in the
Growth Economies of Asia Series, Abingdon: Routledge.

Ville, S. and Withers, G. (ed.) (2015), The Cambridge Economic History of Australia, Cambridge University Press.
Recent, up-to-date coverage of Australia’s distinct economic history.

Williamson, J. G. (1998), ‘Growth, Distribution and Demography: some Lessons from History’, Explorations in
Economic History, 35 (3), 241–71.

Williamson, J. G. (2000), ‘Globalization, Factor Prices and Living Standards in Asia before 1940’, in A. J. H.

Latham and H. Kawakatsu (eds.), Asia Pacific Dynamism, 1500–2000, London: Routledge. Focuses on real wages
rather than GDP to assess living standards.

Williamson, J. G. (2006), Globalization and the Poor Periphery before 1950, Cambridge, MA: MIT Press.

World Bank (1993), The East Asian Miracle. Economic Growth and Public Policy, Oxford University Press.

World Bank (2014), Various countries,, accessed September 2014.


Baten, J. and Blum, M. (2012), ‘Growing Taller, but Unequal: Biological Well-being in World Regions and Its
Determinants, 1810–1989’, Economic History of Developing Regions 27, s66–s85.

Bulbeck, D. A., Reid, L., Tan, C. and Wu, Y. (1998), Southeast Asian Exports since the 14th Century: Cloves,
Pepper, Coffee and Sugar, Leiden: KITLV Press.

Findlay, R. and O’Rourke, K. (2007), Power and Plenty. Trade, War and the World Economy in the Second
Millennium, Princeton University Press.

Marshall, M. G., Jaggers, K. and Gurr, T.R. (2011), ‘Political Regime Characteristics and Transitions, 1800–2010’,
Dataset Users’ Manual, Center for Systemic Peace and Societal-Systems Research Inc, Arlington,, accessed 20 July 2015.

Mitchell, B. R. (2007), International Historical Statistics. Africa, Asia and Oceania 1750–2005, Basingstoke:
Palgrave Macmillan.

World Trade Organization (WTO) (2013), Statistics. Merchandise Trade and Commercial Services,, accessed November 2013.


Pre-history, ancient and classical periods of
Southeast Asia

Martin Shanahan

Little is known about the pre-historical migrations of people through Southeast Asia and Oceania. Archaeological
evidence suggests waves of migration, perhaps corresponding to changes in sea levels and climatic conditions.
These factors influenced hunter-gatherer communities for over 700,000 years, although archaeological records are
only reliable for the past 40,000. The original inhabitants of Australia and Papua New Guinea are believed to have
migrated from the Asian mainland perhaps 50,000 years ago, while the Maori in New Zealand, probably originating
in Southeast Asia, arrived via Polynesia around 1,000 years ago.

Insights into migration patterns are found through similarities between language groups. Linguistic scholars
trace the influence of Tai speakers in Thailand, among the Shans in Burma, in Laos and northern parts of Vietnam
and in Cambodia and Malaysia. Austronesian (linked to the Indonesian/Malay language group) is detectable in
Timor-Leste, Indonesia, Malaysia, the Philippines and coastal regions of Thailand, Cambodia and Vietnam. The
peoples of Papua New Guinea and New Zealand appear to be linguistically distinct.

While there is now considerable diversity in national, ethnic and religious groups across the region, there are
also ancient connections. Southeast Asia and its peoples has always been much more than simply off-shoots of
Indian or Chinese civilizations, despite these cultures’ important long-term influences.

Agriculture emerged in different locations sometime between 11,000 and 6,000 years ago. Climatic conditions
meant that more intensive rice farming was favoured in mainland Southeast Asia while in the equatorial regions,
tubers, sago palm and some fruits were prominent. Proximity to water and the sea made fish an important source of
protein. Notably, the indigenous populations of Australia did not develop intensive agriculture, and their protein
sources depended on what they could hunt, fish or gather.

Although it is difficult to reconstruct the history of migration in Southeast Asia, several ancient civilizations are
known through their archaeological remains. Mogul invasions and wars, such as the one between the dynasties of
Vietnam and China, also shaped today’s cultures. These hostilities, for example, ultimately shaped the Vietnamese
identity as one quite separate from its northern neighbours. In the west, the interplay was between Indian influences
and the emerging Khmer dynasty, and between India and the people of Pagan in northern Burma. While the dynasty
in Pagan collapsed in 1289, it was gradually absorbed and replaced by the more northern-based Ayutthaya Empire –
an empire modern Thais still regard as a building block of their identity.

The Angkorian (Khmer) Empire in Cambodia, which existed from around 800 AD to 1400 AD, stretched over
much of modern Cambodia, southern Vietnam and southern Laos, as well as influencing more distant territories.

Today its most famous legacy is the temple complex centred around Angkor Wat. This empire ultimately relied on

investment in canals, reservoirs and irrigation that enabled two or three wet-rice crops per year rather than one.
Increased climatic and political challenges in the fifteenth century and declining human and physical capital meant
the demise of the empire and city that the thirteenth-century Chinese envoy Zhou Daguan had described as the
richest in Southeast Asia.

The southern Sumatran trading empire of Srivijaya dominated maritime trade between India and China and
especially the western section of the Indonesian archipelago and southern China from the seventh to the thirteenth
centuries. Although this empire worked co-operatively with the Chinese, as the Chinese began to use their own fleet,
other trading regimes based in Melaka emerged to challenge Srivijaya’s dominance. These trading empires were
scarcely known to the Portuguese, who arrived more than two centuries later, and who continued rather than
founded a tradition of international trade.

Other important and long-standing empires are today also lost from direct view. Majapahit, the last of several
trading empires in Java, existed between the eighth and fifteenth century. It influenced trade from the western tip of
Sumatra, to the Philippines in the north and New Guinea in the east. Evidence of its inhabitants’ wealth and
economic control remain in walled terraces and massive monuments.

The importance of trade in spreading populations and linking regions should not be underestimated. Centuries
before the empires of Pagan and Angkorian, maritime traders from Southeast Asia were known to the Chinese,
Indians, Arabs and Romans. Small quantities of high value goods from cinnamon to gold were traded between
Southeast Asia, India, the Middle East and Europe. By the fifteenth century European awareness and demand for
these commodities began to match their navigational and shipbuilding ability to reach their source. Motivated by the
desire to convert, conquer and consume, the empires of Europe began to send out traders, sailors and soldiers to the
Molucca and Banda islands (Spice Islands) and beyond, where they hoped lay opportunities to grasp, wealth to
amass and souls to save.


Institutional development in world economic

Joerg Baten

Institutional differences are among the most prominent candidates that might be able to explain the contrast between
rich and poor countries and regions. Following a long tradition of institutional economics, Acemoglu and Robinson
(2012) recently discussed the role institutional settings played in historical developments. They emphasized that
inclusive ‘institutions of private property’ encourage investment, whereas ‘extractive institutions’ are poison for
economic development. The latter effect occurs if a large part of the population is at risk of being expropriated by
the government, ruling elites, or other agents. The former set of political, economic and social arrangements
(abbreviated “inclusive institutions”) ensures that a broad cross-section of the population can benefit from their
investments (not only, for instance, a small group of large landowners).

One example for their view is the different behaviour of the inhabitants of the mainland of Southeast Asia on
the one hand and the Australia/New Zealand region on the other. Southeast Asia was traditionally characterized by
institutions that were not conducive to economic growth. The most extreme case was Kambodsha during the 1975–
78 period, when the Red Khmer aimed at creating an extreme version of agrarian communism, with the effect of two
million human victims. Other countries were much less inhuman, but mainland Southeast Asia was, until recently,
ranked low for its institutional and political institutions. Only during the 1990s were economic and political
institutions substantially changed. The other extreme of this region is the Australia/New Zealand group that was
characterized by growth-conducive institutions over the whole last century. Taking Australia/New Zealand and
Southeast Asia together, the institutional quality index has the largest variability compared to all other world regions
during the early twentieth century.

Another very famous example discussed by Acemoglu and Robinson are the cities of Nogales, Mexico, on the
one hand, and Nogales, US, on the other hand. Both cities are adjacently situated at the border between Mexico and
the US. However, the citizens of the northern city enjoy a far higher standard of living. The argument of Acemoglu
and Robinson for the role of institutions is that entrepreneurs in Nogales, US, can be sure that any investment in
their businesses, and any sacrifice and effort to create innovations, will pay off in the future. The institutional
controls of the executive in the US are designed in a way that guarantees this security of investments. In contrast,
Mexican institutions are described by Acemoglu and Robinson in a way that they sometimes allow expropriations of
returns. Business success is influenced by contacts with political power. For example, the richest Mexican
businessman, Carlos Slim Helú, accumulated his wealth not with an innovative product but by obtaining government
licences in the telecommunications market. In contrast, Acemoglu and Robinson mobilize the Silicon Valley

entrepreneurs as examples for the US focus on innovation. Acemoglu and Robinson focus on cases such as the

Nogales twin cities because their geographic proximity makes it unlikely that other factors, such as geography and
its implication on the prevalence of disease, could explain the substantial difference in welfare (Sachs and Warner
(1997) emphasized malaria in tropical countries, for example). Early human capital differences are also unlikely to
be an underlying explanatory variable in this particular case (on human capital, see Glaeser et al. 2004).

Institutional designs have been described by a number of earlier studies as growth determinants. Already during
the early development of thinking about the political economy, property rights were recognized as important, for
example, by Hayek (1960). Most notably, Douglass C. North received the Nobel Prize in economics for applying the
institutional design idea to long-run developments in economic history (North and Weingast 1989).

One core issue of institutional influences on economic development is the direction of causation: are
institutions really influencing development, or are simply high stages of development associated with good
institutions? To tackle this issue, Acemoglu, Johnson and Robinson developed their famous ‘settler mortality’
variable, which can be used in statistical analyses such as instrumental variable estimation (Acemoglu et al. 2001,
2002). The idea is that European settlement decisions were influenced by the disease environments and population
densities in the target countries. Where disease environment was more benign, as in countries that became the US,
Canada and Argentina, large numbers of Europeans were willing to settle, and they brought their growth-enhancing
European institutions with them. In contrast, areas where the first settlers faced high mortality rates, as was the case
in West Africa, Europeans tended to implement more exploitative institutions. These types of institutions survived
the end of colonialism. Postcolonial governments continued with institutions that were not growth promoting, with
catastrophic effects on growth that have persisted until today.

Albouy (2008) and many others formulated doubts about Acemoglu et al.’s measurement accuracy, although
Acemoglu et al. responded with many arguments. Glaeser et al. (2004) suggested another causal channel to explain
the growth process, namely migrant human capital, which implies criticism of the settler instrument: if potential
instrumental variables are related through another line of causation, they fail to be good instruments. Settlers might
have brought their institutions with them, but primarily, they brought themselves and their embodied human capital,
as Glaeser et al. stressed. Ogilvie and Carus (2014) wrote recently an interesting critique of many hypotheses of the
historical institutional economics literature. Perhaps most provocatively, they reviewed North and Weingast’s
(1989) view that parliaments of wealth-holders usually promote economic growth. Acemoglu and Robinson (2012)
stressed the point that one of the main reasons Egypt, for example, was poorer than England is that the latter had its
Glorious Revolution, which changed the political and, subsequently, the economic system (as well as installed a
parliament of wealthy people). The institutional protection of capital owners is shown in Figure I9.1, and it becomes
clear that England and the Netherlands developed much better and earlier than other world regions. Ogilvie and
Carus first consider the issue theoretically and argue that a parliament of wealth-holders does not automatically
promote growth policies for the whole economy, but the wealth-holders might be more interested in serving their
own aims, for example, by supporting privileges for merchants and craftsmen. They then discuss several cases in
which they do not see a growth-promoting effect of wealthy parliamentarians. For example, in the south-west
German state of Wuerttemberg, a widely unknown parliamentarian system was created quite early (from the late
fifteenth and early sixteenth century). This political system stimulated surprising statements by early political
thinkers such as Charles James Fox, who remarked that only two constitutions existed in Europe, namely that of
Britain and that of Wuerttemberg (Anonymous, 1818, p. 240, cited from Ogilvie and Carus 2014: 420). However, in

spite of the industrial and commercial strata being represented in Wuerttemberg’s parliament, its policies consisted
of preventing economic growth by establishing monopolies, cartels and keeping guilds even longer than the much
more autocratic Prussian state.1 The Prussian rulers were less constrained and, after being motivated by Napoleon’s
military successes against Prussia, they were able to abolish the old and rather exclusive institutions such as guilds
after 1808, whereas Wuerttemberg kept the guilds until 1864. However, this argument might be counterbalanced by
many cases in which autocrats installed economic reforms after military defeats, which were, however, not always
long-lived or systematic. Ogilvie and Carus add other cases, such as the Dutch Republic between the late
seventeenth century and 1800, which caused stagnation, at least partly, by serving the power of already established
business elites, at the expense of potential newcomers, although it might be remarked that the Netherlands had
already the highest GDP per capita and that zero growth rates might not be as surprising.

Figure I9.1 Acemoglu/Johnson/Robinson index of institutional protection of capital-owners
Note: the vertical axis represents index values as defined in the source. Other Europe includes France, Iberia,
Belgium, Ireland and Scandinavia.

Source: based on Acemoglu et al. 2002.

However, Ogilvie and Carus’ point that the wealthy parliamentarians might serve their own interest rather than
the national welfare is well taken. It is the empirical question of how often in human history this was a more
substantial growth obstacle than autocratic expropriation threats. Epstein (2000) had argued contrarily to the North-
Acemoglu-Robinson view that in the Middle Ages, guild-based regimes were often quite successful. A compromise
interpretation was recently put forward by Dincecco (2011), who argued that the combination of constraints on the
executive and a high capacity of early modern states to tax would be growth promoting: the latter capacity enabled
important infrastructure and human capital investment. The interaction with constraints is important because

otherwise, taxes were mostly wasted in wars and other unproductive purposes. In Figure I9.2, it becomes obvious
that Russia, Poland and the Ottoman Empire had very low capacities to tax, in contrast with the Dutch republic and

Figure I9.2 Per capita annual fiscal revenues (in g silver)

Source: based on Karaman and Pamuk (2010).

In sum, the debate about institutional sources of growth and poverty is an exciting one. Institutional quality has
many facets, and it will be important in the future to develop measures and estimates for the various components of
institutional quality.


1. The Wuerttemberg parliament had a substantial influence on the crown.


Acemoglu, D., Johnson, S. and Robinson, J. A. (2001), ‘The Colonial Origins of Comparative Development: an
Empirical Investigation’, American Economic Review 91(5), 1369–401.

Acemoglu, D., Johnson, S. and Robinson, J. A. (2002), ‘Reversal of Fortune: Geography and Institutions in the
Making of the Modern World Income Distribution’, The Quarterly Journal of Economics 117 (4), 1231–94.

Acemoglu, D. and Robinson, J. A. (2012), Why Nations Fail: the Origins of Power, Prosperity, and Poverty, New
York, NY: Crown Business.

Albouy, D. Y. (2008), ‘The Colonial Origins of Comparative Development: an Investigation of the Settler Mortality
Data’, NBER Working Paper No. 14130.

Dincecco, M. (2011), Political Transformations and Public Finances: Europe, 1650–1913, Political Economy of
Institutions and Decisions Series, Cambridge University Press.

Epstein, S. R. (2000), Freedom and Growth: the Rise of States and Markets in Europe, 1300–1750, London:

Glaeser, E. L., La Porta, R., Lopez-de-Silanes, F. and Shleifer, A. (2004), ‘Do Institutions Cause Growth?’, Journal
of Economic Growth 9 (3), 271–303.

Hayek, F., von (1960), The Constitution of Liberty, University of Chicago Press.

Karaman, K. K. and Pamuk, S. (2010), ‘Ottoman State Finances in European Perspective, 1500–1914’, Journal of
Economic History 70, 593–629.

North, D. C. and Weingast, B. R. (1989), ‘Constitutions and Commitment: Evolution of Institutions Governing
Public Choice in Seventeenth Century England’, Journal of Economic History XLIX, 803–32.

Ogilvie, S. and Carus, A. W. (2014), ‘Institutions and Economic Growth in Historical Perspective’, Handbook of
Economic Growth 2A, 403–513.

Sachs, J. D. and Warner, A. M. (1997), ‘Sources of Slow Growth in African Economies’, Journal of African
Economies 6 (3), 335–76.


Sub-Saharan Africa

Gareth Austin

Almost all the literature on the economic past of Sub-Saharan Africa has aimed at explaining, directly or indirectly,
why the sub-continent is relatively poor. At the end of the colonial period, which for most African countries was
about 1960, it was conventionally assumed that very little had changed in African economic history, especially
before what, for most of the continent, was the relatively short period of colonial rule. The focus on poverty as the
problem requiring explanation sometimes obscures other aspects of African economic history, such as the
achievements of African farmers, traders and states, including improvements in food security, and episodes of
economic growth. On the whole, however, the historical research carried out over the last fifty to sixty years (since
Dike 1956) has used these achievements as means both of qualifying the notions of general poverty and stasis, and
as sources of insight into why the overall economic development of the region has not been faster. This chapter
begins by introducing alternative explanations of Africa’s relative poverty, and then traces the history of poverty and
economic development in African economies over successive periods. Finally, we will review the overall
descriptions of African economies as historically static and therefore remaining poor, and comment on the major

The main explanations for Africa’s historic – if relative – poverty can be grouped in different ways: perhaps most
fundamentally, external versus internal, and institutional versus resources. The two most influential strands of
external explanation for Africa’s historic poverty, dependency theory and its rational-choice counterpart, are
themselves institutional, in the sense of focussing on the way resources are controlled, organized and exploited,
rather than on the resources, natural and human, as such. Dependency theory, which was brought to Africa in the
1970s (Rodney 1972, Amin 1976, see also Wallerstein 1976) is the view that the development of the West was
simultaneously – and by the same process – the underdevelopment of the Rest. A rational-choice counterpart of
dependency theory was provided by a group of growth economists in the 2000s (Acemoglu et al. 2001, 2002,
Acemoglu and Robinson 2010, Nunn 2008). Both externalist interpretations are ultra-Eurocentric, attributing
Africa’s fate to European decisions: during the external slave trades (the largest of which was carried on in European
and American ships rather than by North African desert caravans or Arab dhows), and then under colonial rule.
Crucially, both externalist interpretations also agree that in Africa the process of establishing capitalist institutions,
such as private (as opposed to communal and public) property rights, has not gone far enough to promote market-
based economic development. They argue that colonial governments, despite representing capitalist states in Europe,
were content to draw Africa deeper into the world market, without establishing the institutions needed for self-
sustaining economic development.

One of the two most influential strands of internal explanation also gives primacy to institutions as
determinants of economic outcomes. Specifically, it sees indigenous institutions and organizations, from the nature
of the state in Africa to such cultural features as extended kinship systems and ‘communal’ land tenure, as
constraints on economic growth. This view with regard to kinship and land tenure was common (though far from
universal) among colonial officials, and was reiterated in the ‘modernization theory’ of the 1950s–60s. While the
reasoning behind the earlier formulations has long been discredited by research, their conclusions are partly revived,
in a much more informed and nuanced way, in the best of the recent critiques of indigenous institutions (Platteau
2009). Meanwhile, states in Africa – precolonial, colonial, postcolonial – have been criticized from many angles, but
the most influential academic analysis, from the early 1980s to the present, has derived from rational-choice political
science. This approach, pioneered in African studies by Robert Bates, examines how far the private interests of
rulers align with those of the population as a whole, distinguishing the conditions under which rulers will have an
incentive to facilitate economic growth from those in which they stand to gain by predation, rewarding themselves
and their supporters at the expense of general prosperity. In this framework, Bates has analysed aspects of
precolonial, colonial and especially postcolonial political economy, insisting that it has often been rational – for
rulers – to maintain policies obstructive to economic growth and public welfare (Bates 1981, 1983, 2005, 2008).

The other main strand of internal explanation starts from an analysis of natural and human resources (or
‘factors of production’). This factor endowments framework offers four main propositions. The first is that most of
Sub-Saharan Africa, until well into the twentieth century, was land-abundant and labour-scarce. That is, with the
technology of the time concerned, the expansion of output was constrained by the supply of labour, rather than of
cultivable land and other natural resources. The second proposition is that most of this relatively plentiful land was
resistant to intensive methods of agriculture: soils were thin and therefore easily eroded (for example by heavy

ploughing); animal diseases such as trypanosomiasis (sleeping sickness) prevented or inhibited the use of large
animals over much of the continent, whether in transport or farming; and the extreme seasonality of the distribution
of rainfall over the year in much of tropical Africa severely limited the productive uses of land during some months
of the year, the heart of the dry season. Proponents of the factors of production approach go on to argue, third, that
these resource characteristics help to account for choices of technology, such as the preference for ‘extensive’ rather
than ‘intensive’ use of land (until the latter became scarce) (Hopkins 1973, Austin 2008). Finally, characteristic
institutions of precolonial and (often) colonial Africa such as diverging rather than converging inheritance systems,
and reliance on coercion as a means of recruiting labour from outside the household, have also been explained in
such terms (respectively, Goody 1976, Hopkins 1973, Austin 2005, Fenske 2012, 2013). A related argument is that
low population densities and the constraints on the productive use of land combined to inhibit state formation by
making it difficult for would-be rulers to extract large revenues from farmers and pastoralists (Coquery-Vidrovitch
1969, Herbst 2000). The famous ‘exception that proves the rule’ is the kingdom of Ethiopia. Situated in a relatively
fertile region, suitable for ploughs, this monarchy and its ruling class was able to extract an agricultural surplus from
peasant cultivators (Crummey 1980), sufficient to sustain what turned out to be one of the most enduring polities on
the planet (see also the Highlight Chapter 10.1).

Finally, scholars writing broadly in the tradition of Karl Marx have long contributed to the debate on African
development, without ever becoming the orthodox view, even on the political left. While they share with
dependency theorists the proposition that capitalism came to Africa from outside, they reject the radical pessimism
of the dependency (and Acemoglu et al.’s) view of the impact of colonialism in Africa. Instead, they propound a
‘tragic optimism’: that out of violence and exploitation came advances in technology and the organization of
production. They emphasize the extent to which capitalist development has actually occurred, citing in evidence the
growth of wage labour over the last century and more, and the growth of education and manufacturing (Sender and
Smith 1986, Sender 1999).

African economies, 1500–1650
In this period, even more than later, Sub-Saharan Africa is most accurately seen as comprising a number of regional
economies which were not necessarily strongly linked with each other. An example of such a region was the
‘Central Sudan’, comprising a series of local savannah economies united by trade networks centred in what is now
northern Nigeria and southern Niger, extending into Burkina Faso and engaging also in trans-Saharan trade
(Lovejoy and Baier 1975). However, African networks were not only regional. Trade via the Sahara and the eastern
seas was already ancient in 1500 (see Map 10.1), and the institutional framework for long-distance trade across
political and cultural boundaries had long been strengthened by the adoption of Islam as a cultural and moral
foundation for trust among and with traders. This applies especially to the Swahili-Arab towns of the east coast, and
to the courts and trading networks of the West African savannahs.

Map 10.1 Trade of Africa 1450–1600

Source: The maps in this chapter were modified by Mina Moshkeri, former cartographer of the London School
of Economics, from J. F. A. Ajayi, M. Crowder, P. Richards, E. Dunstan, and A. Newman, Historical Atlas of

Africa, Harlow, UK: Longman (1985).

The fifteenth century had seen the beginning of direct trade with Europe. Portuguese navigators had explored
the coasts, partly in order to bypass the Saharan middlemen in the trade of West African gold to Europe, and partly
en route to India. They acquired a string of coastal bases, and inaugurated the Atlantic slave trade when they

purchased captives from the kingdom of Benin (in what is now Nigeria) and sold them to African merchants on the
coast of what is now Ghana (Rodney 1969). In 1652, the Dutch East India Company founded a colony on the
southern tip of Africa.

Evidence on what was happening in the interior is thinner. But archaeologists have shown that ‘islands’ of
intensive agriculture existed across the continent (Sutton 1984, Widgren and Sutton 2004). Intensive agriculture was
old; but where it began, it often proved temporary, for environmental or political reasons (e.g., Delius and Schirmer
2014). The great majority of land continued to be used extensively, either cultivated under some kind of rotation
system with long fallows, or used for itinerant pastoralism. Likewise, large states existed in certain areas, tending to
reproduce themselves in some form over centuries, as around the Great Lakes or the Niger Bend, as well as the
Christian kingdom of Ethiopia. But there was no clear trend towards a long-term increase in the proportion of the
African population living in states. There is some evidence of expansion of extra-subsistence production and trade in
the Zambezi valley, along the east coast and in West Africa. Concentrated settlement, including towns, was also
marked in certain areas, such as Zimbabwe, along the east coast and along parts of the Niger river, but without
necessarily continuing to expand. While specific local histories were undoubtedly involved, the general constraints
of low population density and environments hostile to intensive agriculture are surely part of the explanation.

Yet evidence of cumulative expansion of markets, apparently with expanded production for sale and denser
commercial connections, can be found in this period, especially in West Africa (Inikori 2007). Africans took
advantage of the opportunities presented by the Atlantic trade in an era where slaves were still only one of several
major commodities. A significant feature of Africans’ external trades was the large-scale importation of currency
materials, such as cowries. This is best documented from trade with the Europeans, who did not accept these
materials back in return for other imports: so we can deduce that they were used as currencies only in trade within
Africa, testifying to the vitality of internal commerce (Inikori 2007).

Africans also used the Atlantic trade to enlarge their crop repertoire. Following a long history of African
imports of crops and crop varieties from Asia, the Portuguese inaugurated an equally important series of imports
from the Americas. African farmers adopted these selectively; maize and cassava enhanced calorific returns to both
land and labour (Miller 1988, McCann 2005). Meanwhile, however, the emergent plantation system of the European
empires – in the Atlantic islands, and then in the Americas – expanded the demand for captive labourers from
Africa. Arguably, the size of the African population is un-guessable before its parameters were shifted by the
combination of more efficient food farming and much increased slave exports. There is no reason to assume that
they cancelled each other out.

Africa during the peak of the Atlantic slave trade, 1680–1800
For west and west-central Africa especially, this period was dominated by an escalation of the Atlantic slave trade to
unprecedented levels, responding to the expansion of the Atlantic plantation system. The effects on peaceful
production and trade were dire. Not only did the Atlantic market encourage private and state enterprise into slave
raiding and slave-trade-stimulated warfare, but wars and raids made the pursuit of peaceful forms of production
dangerous: at least parts of the ‘Gold Coast’ even became net importers of gold (Rodney 1969). On the other hand,
those enslaved were overwhelmingly ‘foreigners’, or people excluded from society for heinous crimes, as far as
those who sold them were concerned – contrary to the myth that Africans tended to enslave kin and fellow citizens
(the exceptions were mainly in central Africa, as a last resort: see Miller 1988).

Admittedly, the Atlantic trade as a whole still brought certain advantages. Besides the new crops, the currencies
that the West African merchants adopted were technically more efficient than their earlier commodity currencies, as
was reflected in the expansion of a dual cowrie-and-gold-dust zone in West Africa (Lovejoy 1974). This can be seen
as an institutional reform that reduced the cost of doing business; though the developmental benefits of this were
limited as long as the business including slaving.

It is impossible to estimate with any precision the demographic impact of the Atlantic slave trade (still less that
of the other external slave trades, which are much less documented). For the Atlantic slave trade, at least, we have a
pretty good knowledge of the numerator (close to 13 million captives embarked: see Table 10.1), but only a rough
idea of the denominator (the population of Africa: see Thornton 1977, Henige 1986). What is clear is that population
densities were low relative to Eurasia (Austin 2008a: 590–1), and that, as noted, labour rather than land was the
crucial supply constraint on production. We can, however, observe that the external slave trades, including the
Atlantic, presumably enhanced inequality. Slave-holding within Africa increased as a joint product of the supply of
exports, and there was also a high entry threshold of slave-raiding and trading as a business. All these developments
made aggressive states profitable, and aggravated shortages of labour, and of effective demand (Hopkins 1973).
Overall, in this time of mortal danger for stateless societies, there was probably a net increase in political

Table 10.1 Estimated slave departures from Sub-Saharan Africa in the different external slave trades, c. 1500–c.

Trade 1501–1600 1601–1700 1701–1800 1801–1900 Total

Saharan 550,000 700,000 700,000 1,200,000 3,150,000

Red Sea 100,000 100,000 200,000 492,000 892,000

East African 100,000 100,000 400,000 442,000 1,042,000

Atlantic 338,000 1,876,000 6,495,000 4,027,000 12,736,000

Total 1,088,000 2,776,000 7,795,000 6,161,000 17,820,000

Key: ‘Saharan’ includes Nile Valley. ‘Atlantic’ includes shipments to Europe and the African Atlantic islands. Only
in the Atlantic case are the figures based on data good enough to be called estimates rather than ‘guesstimates’.

Source: modified from Lovejoy (2012): 19, 46, 138. For the earliest and latest periods, Eltis et al. (2008) give
lower totals for the Atlantic trade: 278,000 and 3,874,000.

This period has been a focus of the scholarly debate about economic cultures in Africa, specifically on the
question of whether resources in precolonial economies were allocated by the price mechanism, or by non-economic
principles such as command and custom. Karl Polanyi devoted his last book to a study of the kingdom of Dahomey,
claiming that the prices in its many markets were fixed (Polanyi 1966): a view comprehensively falsified by
subsequent research (Hopkins 1973, esp. 6, 69–70, 112, Law 1992).

At the Cape, the importation of slaves, who were primarily used on large wine-growing estates, made for high
living standards among the white population in the eighteenth century (Fourie 2012). Within Sub-Saharan Africa as
a whole, however, European rule remained rare, localized and literally peripheral. On the east coast, the late
eighteenth century witnessed the start of a fight-back by the Omani dynasty against Portuguese control of towns,
forts and harbours (Sherrif 1987, Alpers 2009).

Markets, slaves and states, 1800–80
This period can be characterized by two contrary impulses, both of which lasted into the colonial era: the pressure
for abolition, first of slave trading and then of slavery itself; and, in contrast, the continuation and actual expansion
of the other slave trades in and from Africa, and the expansion of slavery within Africa. We saw from Table 10.1
that the British act to abolish the slave trade, in 1807, was unable to prevent an additional 4 million slaves being
embarked to Atlantic destinations, especially Brazil and Cuba, before the last ship sailed in 1867. Meanwhile, the
Saharan, Red Sea and Indian Ocean slave trades appear to have reached record levels. The latter was especially
intense in the 1850s to early 1870s, with the development of elaborate slave-raiding and trading networks, notably
via Tanzania.

At the same time there was a major expansion of commodity production for both regional and extra-African
markets in West Africa and parts of East Africa, such as the kingdom of Buganda, which until mid-century had no
regular or direct trade with the coast and beyond (Reid 2002). The expansion in West Africa was partly a function of
the transition from the export of slaves to what abolitionists called ‘legitimate’ commerce, especially palm oil and
peanuts (Hopkins 1973: 124–35, Inikori 2009). Much of it, however, was an unintended consequence of the creation
of the Sokoto Caliphate in 1804. At its height, this was the most populous African state of the period, occupying
most of north-central and north-west Nigeria and parts of what are now neighbouring countries. Its commercial
prosperity was based on internal peace and market integration, an extensive export-trade network run by Hausa
merchant diasporas and regular enhancements of the labour supply through the importation of ‘pagan’ captives as
slaves (Lovejoy 2006). Kano, its commercial capital, became the biggest manufacturing centre in the region,
exporting cloth all over West Africa, as was described by the German explorer Heinrich Barth from his visit in 1851
(Barth 2011[1857]: 125–9).

The growth of commodity production both increased demand for, and was facilitated by, the increased use of
slaves within much of the region: especially in West Africa (almost ubiquitously) but also on the eastern coast, from
Somalia down to Tanzania (Cooper 1977). Labour coercion in the pastoral economies of South Africa took a
different form: the appropriation of the labour of young adult men for herding and warfare by the Zulu monarchy
and its imitators. With both models of labour coercion, the position of women tended to be reduced relative to men:
females are thought to have comprised the majority of slaves within Africa (Robertson and Klein 1983), and the
elevation of the warrior role was at the expense of the status of ascribed female roles (Mandala 1984).

Historians have paid much attention to the issue of changes in the character of African states in this period.
Several partly distinct tendencies may be distinguished. First, there was a jihadist wave in western, central and
eastern Sudan (the savannahs south of the Sahara, from Senegambia to what is now the republic of Sudan). This
wave, of which the formation of the Sokoto Caliphate by Uthman dan Fodio was part, made Islam a mass rural
religion for the first time in much of the region concerned, as distinct from being limited mainly to rulers and
merchants. The Caliphate introduced the Islamic repertoire of taxes, a feature of which was light taxation of artisanal
production and commerce, facilitating economic expansion (Lovejoy 2006). Second, the Zulu kingdom has been
seen as a new kind of state in southern Africa, a patrimonial military autocracy rather than a ‘tribe’, which became
the model for both ‘offensive’ and ‘defensive’ states in the region, such as the Ndebele and Lesotho kingdoms,
respectively. This view has been much debated (Hamilton 1995). For economic historians, it is worth noting that

Lesotho, for example, showed that ‘defensive’ nineteenth-century states, at least, could provide a setting favourable
to the growth of agricultural and artisanal production for the market (Eldredge 1993). Third, the late nineteenth
century saw major efforts by kingdoms to ‘modernize’ to meet the threat of European imperialism, as in the cases of
Ethiopia (with some success, defeating the Italian invasion of 1896) and Asante (in Ghana; ultimately
unsuccessfully). One can again argue that the greater success of Ethiopia was made possible by its long-standing
environmental exceptionalism, which permitted the rulers a logistical foundation inconceivable for other African
kingdoms (see Highlight Chapter 10.1 by Marjolein ’t Hart).

The colonial era, 1880–1960
Within the long history of European overseas empires, the partition of Africa is notable for its compression in time,
and even more for its relative lateness. The timing does not fit everywhere south of the Sahara, but most of the
territory and population were subjected to colonial annexation some time during the European ‘Scramble’ for Africa,
1879–c. 1905; and most recovered their independence around 1960. Both the lateness and speed of the partition are
partly explained by technological changes which made it both more attractive and less costly for European countries
to invade Africa. The progressive industrialization of Europe and North America created new or at least massively
enlarged markets for a range of agricultural and mineral products from Africa. Meanwhile, the cost of coercion for
the European powers was reduced by the adoption of quinine against malaria, and by advances in military and
transport technology. While none of this made the partition of Africa inevitable, European confidence in their own
power, coupled with fears within individual European countries that their rivals would make further annexations in
Africa and monopolize its resources if they did not do likewise, helps explain how the Scramble began and was

It is important to distinguish different types of colony in Africa: settler economies (or, ‘settler-elite’, when
compared to colonies elsewhere in the world where the indigenous population were almost totally displaced, unlike
in Africa) in which most of the land was reserved for European use, especially that of individual farmers; ‘peasant’
colonies, where Africans retained almost all the land; and plantation/concession colonies, in which large areas, but
not necessarily the majority, of the land was alienated to European companies. To simplify the comparison, we will
concentrate here upon the extremes, the settler and ‘peasant’ colonies.

In the settler economies, African farmers responded rapidly to opportunities to produce crops for the markets
provided by towns and mines (Arrighi 1973, Palmer and Parsons 1977). Initially, African real wages also tended to
be high, reflecting labour scarcity and the fact that Africans still often had access to land (for example, Harries 1982:
143, 161 n.). In response, the governments of settler economies embarked on policies aimed at driving Africans out
of the produce market and onto the labour market: by reserving land for European use, and restricting or prohibiting
African tenancy on European-owned land (Arrighi 1973, Palmer and Parsons 1977, Mosley 1983). By the late 1920s
and especially by the mid-1930s it was clear that African production for the market in Southern Rhodesia and Kenya
was resilient despite these policies, even during the Great Depression. In response, government policy shifted
towards taxing such production, directly or indirectly, rather than trying to eliminate it (Mosley 1983). In South
Africa, with by far the biggest proportion of whites to blacks, the original colonial policy against high income for
blacks was more successful. Black real wages in gold mining were ratcheted down during the 1890s and 1900s by
the creation of a private monopsony as well as by the state policies mentioned above, and did not regain their 1911
level until 1972 (Lipton 1986: 410). Charles Feinstein has illustrated quantitatively that without such wage
repression the South African gold mining industry could have been only a small fraction of its actual size by the
early 1930s (Feinstein 2005: 109–12).

Meanwhile, the peasant colonies were the setting for the ‘cash crop revolution’: a widespread expansion of
export agriculture by African producers during the early colonial period (Austin 2014a). But their participation was
varied in nature and degree. The growth was dramatic in a handful of colonies, where African traders and farmers
responded as risk-taking entrepreneurs to the opportunities presented by the continued expansion of markets in the

West for produce that could be grown efficiently in Africa. Where farmers could produce for export without
imperilling their own food security, they did so with alacrity, as with cocoa beans in Ghana and Nigeria, and peanuts
from northern Nigeria. Elsewhere, they resisted, until reassured by improved provision of transport or storage, as in
western Uganda (Tosh 1978). The demand for labour created by this expansion attracted seasonal migrants into the
cash-crop zones from areas that lacked the soils and/or access to transport required for profitable production. Thus
male migrant labour flowed from Rwanda into Ugandan cotton production, from Mali into Senegalese peanut
cultivation, and from the savannah of northern Ghana and what is now Burkina Faso, into cocoa growing in the
forest zone of southern Ghana (see Map 10.2). In the more prosperous ‘peasant’ colonies, Nigeria and Ghana –
whose main actors are more accurately described as indigenous small-scale capitalists rather than peasants (Hill
1997[1963]) – Africans were not only pioneers of the adoption of exotic crops, notably cocoa beans, but also of
lorry ownership (Hopkins 1978, Drummond-Thompson 1993).

Map 10.2 Export specialization in Africa, c. 1928

Source: see map 10.1.

Colonial rule was intended to be cheap: the local administrations faced a combination of constraints on their
fiscal capacity and therefore on their freedom of manoeuvre. They encountered broadly the same obstacles to
political centralization as their African predecessors had faced, especially the difficulty of extracting revenue from
domestic agriculture (Frankema and van Waijenburg 2014). In addition, they had problems arising from the nature
of the colonial enterprise: the imperial requirement that colonial administrations balance their budgets, and the need

to avoid provoking resistance and thereby the expense of suppressing it (Gardner 2012). From these constraints
followed the characteristic colonial reliance (more so in the British case, less so in the French) on ‘indirect rule’, i.e.,
rule through the chiefs or emirs. This system was intended to harness the legitimacy of indigenous authorities to
colonial ends, especially in order to limit the need to employ expensive European personnel. In c. 1939 the
supposedly 43 million (actually many more) inhabitants of British tropical Africa were presided over, at least
nominally, by a combined total of 2,339 white administrators, judges, police and soldiers: over 18,000:1 (Kirk-
Greene 1980). Foreign investment in the African colonies, private as well as public, was similarly minimal: only
mines attracted large flows of capital. A study published in 1938, by S. H. Frankel, remains the only attempt at a
comprehensive count. According to his figures, 42.8 per cent of all overseas investment in European-ruled Africa
south of the Sahara went to South Africa. This represented £55.8 per head in South Africa, but only £4.8 per head in
the ‘peasant’ colonies of British West Africa, and only £3.3 per head for the French colonies (Table 10.2).

Table 10.2 Overseas investment in Sub-Saharan Africa, 1870–1936 (nominal British pounds)

Aggregate Per head of

Union of South Africa 554,681 55.8

Southern and northern Rhodesia (Zimbabwe and Zambia) 102,403 38.4

Angola and Mozambique (Portuguese) 66,732 9.8

Belgian Africa (Congo and Rwanda-Burundi) 143,337 13.0

French colonies 70,310 3.3

British East Africa (Kenya, Uganda, Tanganyika, Malawi) 110,189 8.1

British West Africa (Nigeria, Ghana, Gambia, Sierra Leone) 116,730 4.8

All European-ruled Sub-Saharan Africa (including Sudan,
Zanzibar, but excluding Portuguese Guinea)

1,221,686 <12.7

Source: Frankel 1938: 158–9, 169–70.

Settler administrations employed indirect rule, but were less constrained fiscally than the administrations of
other colonies, especially where they became self-governing. South Africa became independent (as a dominion
within the British empire) in 1910, as a white-minority regime. Southern Rhodesia became self-governing internally,
with the same type of regime, in 1923. Both settler governments, especially South Africa, had the advantage of
access to royalties from mines that were unusually lucrative by colonial African standards.

The distinction between types of colony had important effects on the medium and long-term economic
outcomes, for African welfare and structural change. European colonization did not in itself alter the economic
incentives to holders of power to use coercion in labour recruitment. Hence, besides using forced labour themselves
to varying degrees, many colonial administrations took years or even decades to implement their international
commitments to abolish slavery. In the peasant colonies, where most of the slaves were located, it was the growth of
export agriculture that allowed the formal abolition of slavery to become an economic and social reality, by

providing opportunities for former slaves as hired labourers or as small independent peasants (Austin 2009). The
growth of export agriculture enabled the African real wages to rise earlier, higher and more resiliently in the more
prosperous peasant colonies than in the settler colonies. Until the Second World War at least, real wages in the cities
of British West Africa were equal or higher than in those of South and East Asia (Frankema and van Waijenburg
2012; see Figure 10.1). Crucially, the retention of rights to land going further than the minimum subsistence plots
onto which Africans were mostly crowded in settler colonies, gave the inhabitants of peasant colonies greater
bargaining power (Austin 2005), which was reflected in higher incomes and physical welfare (Bowden et al. 2008).
This also had implications for human capital formation in African countries, because parental investment also
depended on wage expectations: in Africa in general and West Africa in particular, numeracy was also higher than
in South Asia (Figure 10.2).

Figure 10.1 Average real wages in cities of southern Nigeria, Ghana, China and India, 1880–1950

Source: based on Frankema and van Waijenburg (2012); growth rates of China/India from

Figure 10.2 Numeracy in South Asia and Sub-Saharan Africa (total), and in selected west African countries

Source: calculated from Crayen and Baten (2010);

We have noted that African opportunities for entrepreneurship in the broader economy were also greater in
peasant economies. This was least so, however, where a significant proportion of African labour was commandeered
by the state, as in the French system of corvée, abolished only in 1946. Again, even under the relatively liberal
regimes of British West Africa, Africans faced a fundamental asymmetry in the structure of competition. Whereas
the markets peopled by Africans were highly competitive, those dominated by Europeans had a very strong tendency
for competition to be restricted by collusion, including formal cartels (Hopkins 1978, Olukoju 2001–02, Austin and
Uche 2007). African traders, farmers and pioneer bankers struggled against this with varying degrees of success
(Hopkins 1966, Nwabughuogu 1982). Still, the economic space for African initiative was even less where they
lacked a foundation in commercial agriculture, as was very largely the case in the settler colonies.

The story was different with manufacturing. In 1960, the two African countries with the largest shares of
manufacturing in output were South Africa, at about 20 per cent (Lipton 1986: 402), followed by another settler
economy, Southern Rhodesia, and then the Belgian Congo, where industry was concentrated in the copper-mining
province of Katanga. According to Peter Kilby’s data (see Table 10.3), in no other country in the sub-continent had
manufacturing reached 10 per cent of GDP. In various ways, the precocious development of manufacturing in South
Africa, southern Rhodesia and the Belgian Congo owed much to their mining sectors. But political conditions were
critical too: as an unexpected result of a free trade treaty during the Scramble for Africa, manufacturers in the Congo
benefited from access to neighbouring colonial markets. Above all, in South Africa and Southern Rhodesia, settler-
dominated parliaments gave governments the mandate to pursue import-substitution industrialization, from 1924 and
1933 respectively. By contrast, in the largest ‘peasant’ economy, Nigeria, and in the – also ‘peasant’ – colonies with

the highest income per head in colonial Sub-Saharan Africa, Ghana and Senegal, even the modest levels of
manufacturing recorded in 1960 reflected very late expansions, as European firms sought to preserve their markets
by establishing factories before independence arrived (Kilby 1975).

Table 10.3 Output and manufacturing in selected African countries in 1960 (US 1964 dollars)


GDP ($ m) Income per
head ($)

output ($ m)


Southern Rhodesia 3.6 751 206 120.2 16.0

Belgian Congo 14.1 910 58 127.4 14.0

Senegal 3.1 678 218 64.4 9.5

Kenya 8.1 641 79 60.9 9.5

Uganda 6.7 583 87 37.9 6.5

Ghana 6.8 1,503 222 94.7 6.3

Cameroun 4.7 511 109 30.6 6.0

Ethiopia 20.7 1,021 49 61.3 6.0

Northern Rhodesia 3.2 511 155 28.1 5.5

Ivory Coast 3.2 584 181 31.0 5.3

Sudan 11.8 909 77 43.6 4.8

Nigeria 40.0 3,500 88 157.5 4.5

Angola 4.8 726 151 31.2 4.3

Tanganyika 9.6 671 67 20.1 3.0

Key: Southern Rhodesia is now Zimbabwe, Belgian Congo is now DR Congo, Northern Rhodesia is now Zambia,
Tanganyika is the mainland of what is now Tanzania and Sudan includes what is now the independent republic of
South Sudan.

Note: the very approximate nature of some of these figures must be underlined. All the population totals are
questionable, for example, especially that of Ethiopia, for which no census had yet been taken. The size of food crop
production is estimated in all cases, partly by assumption based on the estimated size of population.

Source: Kilby 1975: 472.

We can roughly distinguish three overlapping sub-periods within the relatively short period of colonial rule.
The first saw the conquests and the establishment of colonial administrations, overlapping with a time of relatively
high prices for primary commodities and general expansion of world trade, which ended with the First World War.
The second was the ‘heyday’ of colonial rule, when it was seen as fundamentally stable, but troubled by the
disruptions to the world economy of the Depression and the Second World War. The third was ‘late colonialism’

and decolonization: characterized by greater government taxation and regulation of produce markets (the
introduction of export marketing boards, giving the state a monopoly of exporting which became a key source of
taxation), somewhat greater willingness of imperial governments to spend in the colonies, and the emergence of
explicit struggles for independence rather than simply reform. This periodization works best for the ‘peasant’
colonies, the largest category, and least well for the settler colonies, where the white populations sought to avert
majority rule, and for the colonies of Portugal, which fought wars against independence movements from 1961 until
the revolution in Portugal itself in 1974.

In the long run of African economic history, arguably the two most positive developments of the colonial
period were the introduction of mechanized transport, partly by African initiative in the case of lorries in West
Africa, which was particularly important in a region over much of which disease had previously prevented the use of
animals in haulage on the farm and in transport; and the beginning of the continuous increase in population, a trend
which began at different times in different colonies, but in most places probably within 10–15 years after the global
influenza pandemic of 1918 (Manning 2010, Frankema and Jerven 2014).

Independence and African economies, 1960–present
The economic policies and performances of individual African countries have varied and changed across the half-
century and more that has now elapsed since independence in most of Africa. Subject to that crucial qualification,
two generalizations can be made: that it is possible to distinguish two sub-periods of policy, with the 1980s as the
watershed; and that we can identify three sub-periods of economic performance, with 1973–75 and c. 1995 as the
turning points.

On policy, the 1960s and 1970s saw an intensification of the trend, in place since 1939, towards greater state
intervention in African economies. Conversely, ‘Structural Adjustment’, in the 1980s, was a crucial transition: from
administrative to market mechanisms of resource allocation. The liberal economic regimes established in that decade
essentially continue to the time of writing.

In the earlier period a handful of countries adopted far-reaching socialist policies, whether ‘African’ (Tanzania)
or ‘scientific’ (Guinea, Benin and from 1975 the newly independent former Portuguese colonies, including Angola
and Mozambique). But the main difference was between the franc zone countries and the rest. The former comprise
most of the former French colonies: deciding against monetary independence, and therefore retaining a freely
convertible currency, state intervention in the franc zone mostly stopped short of quotas on imports and internal
price controls. Before Structural Adjustment, on average they had lower inflation and higher economic growth than
most of their Anglophone counterparts (plus Zaire-Congo), who adopted their own currencies. Except for Kenya,
which in most years maintained a fairly high degree of convertibility, in tropical Africa most non-franc currencies
became highly over-valued and not freely convertible. This in turn generated a proliferation of other controls over
volume and price. In some cases this led to episodes of economic contraction rather than mere stagnation, for
example, in Congo (Zaire), Ghana, Guinea, Tanzania and Zambia. Because the proliferating controls created
plentiful economic rents, such policies tailored easily with kleptocracy in the more extreme cases, as in Ghana in
much of the 1970s, and most notoriously, under Mobutu Sese Seko in Zaire (now DR Congo), for decades before his
overthrow in 1997.

In the era of economic liberalism, the franc zone countries stood out in the opposite direction: the value of their
currencies was fixed, albeit to a European currency that was itself floating: the French franc and then the euro. In
1994 the African franc was devalued by 100 per cent against the French franc, to try to assist African exports. On
the whole, the franc zone countries (now numbering fourteen, totalling about 150 million people, including Guinea
Bissau and Equatorial Guinea, respectively former Portuguese and Spanish colonies) have not outperformed the rest
since Structural Adjustment in the 1980s.

The years c. 1960–73/75 saw economic growth outpacing population growth in most countries, but on average
only by about 1 percentage point. In the second sub-period, 1973/75–c. 1995, the aggregate story was slow or
negative growth: the early-colonial (and post-Korean War) boom was ended for most countries by the Organization
of the Petroleum Exporting Countries (OPEC) oil shock of 1973, though often with a slight lag; whereas a handful
of major oil exporters (Nigeria, Angola, Gabon) jumped into rapid growth and forms of ‘Dutch disease’ (the oil-
fuelled appreciation of the currency diverted resources away from alternative exports). The adoption of Structural
Adjustment produced dramatic economic improvements in Uganda and Ghana, but in aggregate, the decade or so
that followed the policy transition was one of stagnant or even negative growth (Figure 10.3 and 10.4). Finally, the

years from 1995 to the time of writing have seen aggregate growth at 4–5 per cent a year, including at least 2 per
cent a year per capita.

Figure 10.3 GDP per capita in Angola, Botswana and South Africa, 1950–2010s
Notes: Y-Axis in Geary-Khamis dollars (1990). The years refer to the beginning of each decade.


Figure 10.4 GDP per capita in Ghana, Ivory Coast, Kenya, Nigeria and Uganda, 1950–2010s
Note: Y-Axis in Geary-Khamis dollars (1990).


A striking feature of post-colonial economic history is that, except for Botswana (the single year 2010 apart),
no country in Sub-Saharan Africa has grown well throughout the whole period to date (Jerven 2014: 75–102). Many
have had a major period of fairly fast growth, sustained for a decade or more, and a similarly extended period of
stagnation or actual decline (Berthélemy and Söderling 2001). A classic comparison is Ghana and Ivory Coast, two
neighbours with very similar environmental and demographic characteristics, both of whom have boomed and
slumped, but at opposite times (Figure 10.4; Eberhardt and Teal 2010). Pessimists might suggest that the alternation
of boom and bust conceals a very low ‘natural’ rate of economic growth, but the ups and downs have both lasted too
long for that to be plausible. A more likely explanation is a combination of policy ‘mistakes’ (often reflecting both
vested interests and, albeit in exaggerated form, the conventional developmental wisdom of the time concerned) and
political instability, the latter tending to be partly the result of the former, but to then be reinforced by it.

The first decade or so of economic liberalization has been described as ‘lost’ in terms of economic growth and
declining expenditure on health and education. As signalled above, two of the most spectacular under-performers of
the era of state-led development policy, Ghana and Uganda, recovered rapidly (Figure 10.4); but the general picture
was dismal. The major issue is how far this was the result of the new policy paradigm, and how far it was
attributable to the fact that the introduction of Structural Adjustment policies roughly coincided with a severe
downturn in world commodity prices. Proponents of economic liberalization argue that the post-1995 boom would
not have been nearly as large, nor sustained through the Western financial crisis that began in 2008, were it not for
Structural Adjustment in the 1980s (Ndulu et al. 2008).

Politically, South Africa rejoined the continent just in time for the post-1995 boom. The economic significance
of the fall of the apartheid regime needs to be seen in context of the reinforcement to the system of segregation that
followed the National Party’s introduction of formal ‘apartheid’ (‘separate development’) after its victory in the
1948 election (in which blacks and most other non-whites did not have the vote). The party’s narrow victory
represented a path not taken: the ousted United Party government had started to advocate a loosening of the existing
segregationist rules in response to evidence that the migrant labour system within South Africa was breaking down,
with soil erosion in the over-crowded African ‘reserves’, the growth of illegal African ‘townships’ around the white
cities and unrest among the black population in both rural and urban areas (Wolpe 1974). Until the late 1960s, or
even the beginning of the 1970s, the National Party’s reassertion of militant white supremacism seemed to pay off
economically, with rapid growth and an influx of foreign investment (Figure 10.3). But even before the Uitenhage
massacre of 1985 triggered the township revolt that cost the government its control of black urban areas,
undermining foreign confidence in the regime and specifically in the currency, the economy had fallen into
stagnation and then decline. GDP per head fell at an average of 0.6 per cent a year over the period 1973–94
(Feinstein 2005: 145–7). Already from 1967, well before the international oil price shock of 1973, the marginal
efficiency of investment had been falling, gradually then rapidly. In other words, the amount of additional units of
investment required to generate one more unit of output rose (Lewis 1990: 132–3). While short-term events
contributed to this, the most plausible interpretation of the underlying upward trend was that the economy needed
more skilled labour if it was to continue growing, but was being held back by the ‘apartheid premium’: the fact that
highly discriminatory education provision, as well as de jure and de facto racial discrimination, made skilled labour
in South Africa very expensive by international standards (Lipton 1986, Nattrass 1991, Feinstein 2005). The
economic logic of the political events that were to come was illustrated by the fact that, in practice, blacks began to
move into semi-skilled positions vacated by the increasingly educated white workforce (Mariotti 2012). This context
does much to explain the encouragement given by big business in South Africa for the negotiation of a transition to
black majority rule, which culminated in the first universal suffrage election in 1994, won by the African National
Congress under Nelson Mandela.

At the time of writing, economic growth has never been as widespread across Sub-Saharan Africa as it has been
during the last eighteen years, if the (distinctly problematic) national income statistics are to be believed (Jerven
2013). In the perspective of African economic history, the question is whether this boom will lead to greater
structural change than its predecessors. Like the pre-1914 and post-1950 booms, it has been led by high overseas
demand for African primary products. This time agricultural exports have been less important than in the past,
compared to mineral exports (including energy), which are non-renewable and, because of their huge economies of
scale, more conducive to inequality. On the other hand, it is arguable that Africa is now better placed to receive the
‘flying geese’ of manufacturing investment, thanks to a relatively cheaper and better educated labour force than it
had at the time of independence (Sender 1999).

South Africa aside, why have African economies not grown faster since independence? While externalist
arguments focus alternately on protectionism and excessive competition in world markets, the most influential
analysts have concentrated on domestic political economy, perhaps in interaction with foreign elites (as with Bayart
2000). In the early 1980s, Bates argued that post-colonial governments represented distributional coalitions. In most
cases, the coalition was primarily urban: hence governments were content to tax export agriculture, even when the
result was to so discourage farmers from reinvesting that the economy as a whole shrank. Ivory Coast and Kenya,

Bates suggested, were exceptions that proved the rule: their rulers were themselves large cash-crop producers, and
they desisted from imposing penal rates of taxation of export agriculture, with the result that their economies were
doing well (Bates 1981). However, the proposition that most African governments were over-taxing exporters but
had no reason to change their behaviour (a ‘stable high rent-seeking equilibrium’) was surely falsified by the fact
that, within a few years, almost all of them had adopted Structural Adjustment. Indeed, by its nature, the general
switch from administrative to market means of resource allocation entailed in the World Bank-sponsored Structural
Adjustment programmes must have reduced drastically the scale of economic rents (which may be defined, in effect,
as surpluses above what the recipients would receive in a competitive market). Thus it seems odd that in the late
1990s leading economists reiterated the claim that rent-seeking was Africa’s main economic constraint – albeit now
attributing it to ‘ethnic fragmentation’ rather than urban bias, a much-criticized move (Easterly and Levine 1997;
compare the comments of Hopkins 2009). Economic rents remain part of economies in Africa, as elsewhere, being
generated in recent years by such redistributions as privatizations and, in South Africa, the ‘Black Economic
Empowerment’ programme. The view that Structural Adjustments were ‘captured’ by the existing elites (Chabal and
Daloz 1999) fits some cases, but does not do justice to the much intensified competition in other economies. But
again, not all economic rents are negative for economic growth (Austin 2008b: 1017–19).

It can be argued that the most fundamental change of the whole post-independence period to date was
demographic: the growth of population accelerated after 1945. There were signs in some countries that the final
phase of the ‘demographic transition’ had begun by the 1980s, with the fall in mortality being followed, after a gap
of decades, by a slight downturn in birth rates, especially among educated women. The tragedy of HIV-AIDS, which
became manifest in the 1990s, especially in southern and parts of eastern Africa, particularly affected able-bodied
people, and thus reduced the growth of the labour force. Land surpluses persisted in some areas, especially in DR
Congo and South Sudan. Even so, the late twentieth century and the start of the twenty-first century saw, on the
whole, further steps in the historic transition of Sub-Saharan Africa from relative abundance to relative scarcity of
cultivable land (for the extreme case of Rwanda, see André and Platteau 1998).

In agriculture, the result was to create new pressures towards intensification, i.e., raising the ratio of labour
and/or capital applied per area of cultivated land. The question is what sort of intensification is predominating. Is it
the negative sort, where more hours of labour increase output, at least in the short run, but with lower overall
productivity, for example when the often major reductions in fallow periods permanently depleted the soil fertility?
Or is it the positive kind, where increased pressure on land stimulates innovation? That debate continues, with
international programme of research into higher-yielding varieties of seed aiming to resolve the question positively.
The queries, however, remain the environment and the extent to which African farmers can shape the pattern of
innovation (Mutsaers and Kleene 2012). So far, higher-yielding varieties have required more water and more
petroleum-based inputs (chemical fertilisers and insecticides), neither of which are cheap for most African farmers
(Richards 2010).

Review (1): Africa, poor and static?
Let us return to the traditional description of Sub-Saharan Africa, as poor and economically static. According to a
classic study, in 1800 in what is now mainland Tanzania, ‘men measured out their lives in famines’ (Iliffe 1979: 13).
Land abundance was no guarantee of subsistence where population was scattered, soils infertile and animal
assistance lacking in arable production. But very widespread access to land certainly helped, in Sub-Saharan Africa
generally (Iliffe 1987). In West Africa, despite the Atlantic slave trade, evidence on heights for the first half of the
nineteenth century suggests that people there were, on average, as tall as those in southern Europe (Figure 10.5,
Austin et al. 2012).

Figure 10.5 Height trends in Ghana, Kenya and Tanzania, 1880–1960s (male)

Source:, calculated on the basis of Moradi (2009), Moradi et al. (2013) and other sources.

For the colonial period as a whole Africans grew taller. In certain countries this applied even from the early part
of the period, according to detailed studies both in the relatively prosperous ‘peasant’ (or small African capitalist)
economy of Ghana, and more surprisingly, also in the settler colony of Kenya (Figure 10.6, Moradi 2009, Moradi et
al. 2013). A larger sample of countries, however, indicates for males that average heights in Africa slightly declined
during the early years of colonial rule in most of Africa (being 0.57 cm less in 1930 than in 1900), before rising
quite strongly in the late colonial era: 2.43 cm more in 1960 than 1930 (Baten and Blum 2012; see also Interlinking
Chapter I8 by Baten and Inwood in this volume on the average decline from precolonial times and the substantial

increase during late colonialism). Tanzania in Figure 10.5 is an example of this pattern. The reported decline in
heights for the early colonial period in mainland Tanzania is consistent with strong evidence that the late nineteenth
and early twentieth century saw a devastating combination of animal and human epidemics, as an unintended side-
effect of the local German invasion, and of the Italian invasion of Somalia (Koponen 1996). The latter brought
Indian cattle to Africa, introducing the rinderpest virus. This devastated herds in eastern and southern Africa in the
1890s, damaging or destroying livelihoods and in some cases leading to famines. Turning to infant mortality,
differences between the political forms of European domination made for contrasts between countries that would not
be predicted on economic potential alone. Given the much greater mineral wealth and investment in South Africa,
compared to anywhere in tropical Africa, it is remarkable that the infant mortality rate among the black population
actually rose, from 254 in 1910–20 to 302 in 1920–30. In Ghana, the rate moved in the opposite direction, from 295
to 110 (Bowden et al. 2008: 161).

Figure 10.6 Height trends in selected African countries and Italy, 1780–1840s (male)

Source: modified from Austin, Baten and van Leeuwen (2012).

In the 1980s and early 1990s it was commonly suggested that, with the notable exception of Botswana, real
incomes per capita in Sub-Saharan Africa were generally not significantly (if at all) higher than at the time of
independence. Yet there had certainly been major advances since independence in education and health, including of
women (Sender 1999). Between c. 1995 and the time of writing, despite violent conflicts in several countries, the
overall economic trends have been positive: in incomes, education and public health.

On the productivity of labour – as the scarce factor in precolonial times, and often later too – we have already
noted that there were major environmental constraints on productivity in agriculture. This applied also to the supply
of raw material for a key precolonial industry, cotton textiles, because planting more cotton meant less time for
planting food crops (Tosh 1980). The antiquity and longevity of the external slave trades seems to imply that the
productivity of unskilled African labour, in commercial terms, was higher outside than inside Africa during that era
(Austin 2008b: 1006; for context and perspective, Austin 2008a). The external trades did not end because that had
ceased to be the case, but rather because they were suppressed. Again, precolonial technologies tended to be
relatively simpler and less productive than those used in Eurasia (Austen and Headrick 1983). But there were
qualifications: the iron smelting technique used in western Africa produced higher-quality metal than the imported
competition, and declined because of exhausting the supplies of fuel (charcoal) rather than because of competitive
inferiority (Goucher 1981). The environmental obstacles to agricultural intensification in African conditions
remained costly, helping to account for the failure of European plantations in Ghana and colonial mechanization in
Tanzania (Austin 1996, Hogendorn and Scott 1981). But in the nineteenth and early twentieth centuries Africans,
especially in West Africa and Uganda, took advantage of the emergence or expansion of overseas markets
(following the Industrial Revolution) for various crops that could be grown profitably in African conditions, to turn
the availability of land into a competitive advantage, raising their own labour productivity in the process (Austin

Indeed, despite the difficulties of quantifying income per head in precolonial and even colonial (and
postcolonial) Africa, it is clear that there were episodes of economic growth in particular regions, sustained over
decades: for example in much of West Africa in the period of ‘legitimate commerce’, between the beginning of the
decline of the Atlantic slave trade and the onset of the European partition of Africa; and again in the more
prosperous ‘peasant’ colonies and – accompanied by coercively-squeezed African wages – in South Africa (Austin
2008a, Jerven 2010, 2012, Feinstein 2005). Since independence, the aggregate picture was of slow growth until
1973–75; then a period of stagnation and even decline; followed by faster and more widespread growth since 1995,
sustained by the Chinese-led commodity boom.

Overall, the general view of Sub-Saharan Africa as characterized by low average real incomes is broadly
upheld during the long period reviewed in this chapter, but with significant qualifications. There were episodes of
economic growth, especially at national and regional level. Very importantly, economic development is more than
economic growth. Africans have worked for centuries towards improving their food security and incomes in
agriculture, above all by the selective adoption of exotic crops and crop varieties, and by further trial and error
experimentation with those already adopted. In this sense, attempts to achieve a ‘green revolution’ in food crop
production in Africa fit into an old, indeed ancient pattern. Africans have also worked to improve the productivity of
labour during the dry season, taking opportunities to extend the agricultural year where possible, and/or to develop
off-farm sources of income (Austin 2008a).

Review (2): economic development in Africa – dynamics and

Returning to the interpretations introduced at the beginning, it is clear that interactions between internal and external
elements, and between resources and institutions, have been critical in determining the paths and patterns of
development in African economies. This is exemplified by the external slave trades. The internal constraints on
labour productivity in agriculture and manufacturing in Africa made it possible for the export of captive labour to be
profitable for the parties to the sale; but without the external market, there would have been no slave exports.

While the resource endowment of the time helps explain why the external slave trades were rewarding for
captors and buyers, they damaged the wider economies of the region, notably by the violence they entailed and
encouraged, and by their reinforcement of labour scarcity. Thus an economic explanation for the export of captives
from Africa, while necessary, is insufficient. A political condition was also required: the willingness of political
authorities, small or large, to participate. Joseph Inikori has argued persuasively that this was facilitated by political
fragmentation: the absence of huge empires capable of enforcing, on a wide scale, the interest of states in avoiding
the large-scale sale of their own subjects (Inikori 2003).

The old claims that Africans were unresponsive to market opportunities are refuted by numerous examples,
including the ‘cash-crop revolution’ in the peasant colonies, and studies of more recent African entrepreneurship
(Forrest 1994). Indigenous institutions, such as systems of group-purchase of land used by the pioneers of the
Ghanaian cocoa industry (Hill 1997[1963]), illustrate that in some cases African institutions were well suited for
exploiting the opportunities presented by the growth of overseas markets for crops that could be grown on African

Crucially, an institution which facilitates economic growth in one period may hinder it in another, when
resource ratios have changed. The colonial government of Ghana repeatedly debated whether to introduce
compulsory registration of individual titles of ownership. It never did so, not least because the existing indigenous
system of land tenure had proved to provide the security of tenure needed by farmers wanting to plant tree crops, a
form of investment that took several years to begin to produce a return. Though the soil itself belonged to the
community, presided over by a chief, crops planted on it belonged to the person who planted them. This guarantee
was evidently sufficient to induce farmers to plant on such a scale as to raise Ghana’s cocoa exports from zero to the
largest in the world in twenty years (c. 1891–1911), and then proceed to multiply it five times from that level in the
next twelve years (Hill 1997[1963], Austin 2005). But by the beginning of the twenty-first century, the situation in
the same region of Ghana had changed. With land now very scarce, because of population growth and expanding
markets for agricultural produce internally as well as externally, the elders of the land-owning communities tended
to assert their own property rights, but to limit and dispute those of ‘stranger-farmers’, even when the latter had been
there for decades. The result was that, in total contrast to the period when cocoa farming began, strangers were now
investing less in their farms (now commercial food farms) than the locals, not daring to leave their land fallow for
long in case someone challenged their ownership (Goldstein and Udry 2008).

Another example of an institution that favoured economic growth (though in this case, at high human cost) in
one period that became a hindrance to it later, is labour repression under the system of segregation and apartheid in
South Africa. The cheap labour produced by this system made possible the early success of the South African

mining industry, facilitating the import-substitution industrialization on which the government embarked in 1924.
But we have seen that, by the 1970s, apartheid had become a brake on corporate profits and macroeconomic growth,
hindering the transition to higher total factor productivity, because the latter required the employment of much more
skilled labour – which the apartheid system made relatively expensive. Both the changing significance of indigenous
land tenure systems in relation to agricultural investment, and the declining utility of labour coercion as a tool of
profit and growth, illustrate the necessity of considering the changing historical contexts when we search for the
long-term determinants of economic development. This sense of changing contexts is, arguably, insufficiently
present even in the sophisticated reinvention (as in Platteau 2009) of the traditional argument that indigenous
institutions were a brake on development. It is even more lacking in attempts to find causal relationships for changes
over very long periods by a static comparison of two far-separated periods, without tracing the intervening changes
(Austin 2008b).

A ‘static geography’ approach to the analysis of African economies has no attraction for economic historians,
who are highly aware that resources change, especially because of human responses to the resource ratios that
happen to prevail at any given time. In a dynamic context, it is useful to think of ‘paths’ of development (Austin and
Sugihara 2013). In this case, the characteristic precolonial choices of technique and institution are to a large extent
explicable as responses to a situation where land was relatively abundant but labour scarce. One example is land-
extensive agriculture: maximizing returns to labour and conserving and restoring soil fertility by extended land
rotation, growing more than one crop in the same field, and leaving occasional trees, and more than occasional roots,
in place (Austin 2008a). Another is social applause for high fertility. When mortality rates fell in the early and mid-
twentieth century, the preference for large families helped to produce a population ‘explosion’ (Iliffe 1989).
Conversely, an institutional approach needs to be tempered by realism about resources. If the main obstacle to
foreign investment in Africa was institutional, there would surely have been a very high level of such investment
during the colonial period, when the risk of expropriation was generally negligible. Rather, the main problem was a
lack of opportunities for embodying capital in forms that would be profitable in African environments (Austin

As already hinted, this grim situation may be changing. The population of Sub-Saharan Africa increased at
least six times during the twentieth century. African workforces are not only much better educated than at the time
of Independence, in global terms African labour is also cheaper than before. This strengthens the logic for
reembarking on industrialization, using labour-intensive methods where possible (Austin 2013). At the time of
writing, however, African real wages are only now being overtaken by Chinese ones, and most African governments
have a long way to go before they can promote the process as effectively as the ‘developmental state’ model requires
(compare Mkandawire 2001). This chapter is not the place to examine the political dimension in detail, but it can
well be argued that the most damaging colonial legacy for economic development was the impetus that ‘indirect
rule’ gave to the strengthening (in some cases, creation) of ethnicity as a mode of mobilizing support in struggles
over limited resources (Mamdani 1996, qualified by Spear 2003). This is as distinct from the creation of a sense of
national solidarity, which makes it easier to ask citizens to accept sacrifices, as is necessary, for example, when
states seek to accelerate, by policy interventions, the transition from a comparative advantage in primary products to
one in manufacturing.

Finally, and in contrast to the Eurocentric interpretations of dependency theory and of some rational-choice
writings, it is necessary to underline the importance of African agency, i.e., African influence over African history.

Even under colonial rule, Africans’ decisions were decisive in the achievement of the ‘cash crop revolution’ in the
more prosperous ‘peasant’ economies, and in the failure of the attempt to drive Africans out of the produce market
in settler economies – except, very largely, in South Africa itself. In the post-independence era, specifically in the
1980s, the decision of most African governments to agree Structural Adjustment programmes with the IMF and
World Bank, in exchange for big loans, was, in case of the economies in greatest difficulty, often in large part the
result of a fiscal crisis resulting from producers and consumers bypassing official markets, and thereby not paying
taxes. And, literally at grass-roots level, African farmers continue to produce new varieties of seed through trial and
error on their own farms (Richards 2010).

The study of Africa’s economic past has been overhung by the question of abiding poverty: why has economic
growth south of the Sahara not been faster? This chapter has emphasized both the validity of the question, and the
need to qualify it by recognition that there have been both episodes of economic growth (usually concentrated in
particular regions) and trends towards economic development in the broad sense, including greater food security.
The major theoretical and historiographical approaches to African economic history variously emphasize external
and internal influences on economic growth, and the respective importance of institutional and resource conditions.
Such economic development as has occurred over the centuries, and the constraints upon it, are indeed the result of
the interaction of both pairs of opportunities and constraints. Despite the importance of foreign slave buyers,
colonial administrations and multi-lateral financial institutions, African economic history has always been greatly –
often decisively – influenced by the decisions of Africans themselves, especially in responding to their own
environments. Finally, as is also hinted above, there is much research to be done in African economic history, a field
in which there is probably more new work being done today than ever before (Austin and Broadberry 2014).

Further reading

Austin, G. (2008a), ‘Resources, Techniques and Strategies South of the Sahara: Revising the Factor Endowments
Perspective on African Economic Development, 1500–2000’, Economic History Review 61 (3), 587–624. A critical
review and restatement of one of the major approaches to the explanation of Africa’s economic trajectory over the
long term.

Bates, R. H. (2005), Beyond the Miracle of the Market: the Political Economy of Agrarian Development in Kenya,
2nd edn, Cambridge University Press. An impressive example of the rational-choice political science approach to
African economic history and political economy.

Feinstein, C. H. (2005), An Economic History of South Africa: Conquest, Discrimination and Development,
Cambridge University Press. The best economic history of the country, combining insights from both sides of the
long-running ‘liberal’ versus ‘radical’ debate about whether racial segregation and apartheid helped or hindered
economic expansion, 1652–1994.

Frankema, E. and van Waijenburg, M. V. (2012), ‘Structural Impediments to African Growth? New Evidence from
Real Wages in British Africa, 1880–1965’, The Journal of Economic History 72 (04), 895–926 (a partly richer
version was published by the Center for Global Economic History, Utrecht University, as Working Paper 24, 2011).
An ingenious and thought-provoking example of a recent wave of studies that are enriching our quantitative sense of
the evolution of bargaining power and living standards.

Hopkins, A. G. (1973), An Economic History of West Africa, London: Longman, reprinted several times. A classic,
full of ideas, beautifully written. While many of the statistics in it have been superseded by subsequent research, this
is still the best introduction to thinking about the economic history, not just of West Africa, but of Sub-Saharan
Africa generally.

Iliffe, J. (2007), Africans: the History of a Continent, 2nd edn, Cambridge University Press. Provides valuable
context for economic historians: erudite and incisive, clearly written, if dense in content.

Inikori, J. E. (2007), ‘Africa and the Globalization Process: Western Africa, 1450–1850’, Journal of Global History
2 (1), 63–86. Incisive long-term perspective, focussed on market expansion within West Africa before the height of
the Atlantic slave trade.

Mandala, E. (1984), ‘Capitalism, Kinship and Gender in the Lower Tchiri (Shire) Valley of Malawi, 1860–1960: an
Alternative Theoretical Framework’, African Economic History 13, 137–69. A densely-written but profound case-
study exploring broad themes.


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Why was Ethiopia not colonized during the late-
nineteenth-century ‘Scramble for Africa’?

Marjolein ’t Hart

By 1870, 10 per cent of African territory was controlled by Europeans. Twenty years later, this had risen to 90 per
cent due to the infamous ‘Scramble for Africa’. Only two African states, Ethiopia and Liberia, remained
independent. Liberia had been colonized by Afro-Americans, which explains its special position, but what lay
behind Ethiopian resistance to European colonization? And why did most of Sub-Saharan Africa succumb during
the ‘Scramble’?

Let us begin with the last question. The obvious differences in military technology were not decisive; various
trade linkages ensured that rich African rulers were able to procure guns. Sub-Saharan Africa had counted several
powerful and vast empires for centuries, such as Mali, Songhai, Asante, Oyo, Kanem-Bornu and Mutapa, often
supported by rich mineral resources such as gold. However, the political economy was usually founded upon
patrimonial linkages and loyalties, not upon land. In contrast to Europe, clear-cut boundaries did not exist and
territorial control was weak. This precluded the levying of substantial taxes upon the populace of a particular
territory. In addition, population densities were low, and most inhabitants subsisted on herding or rain-fed
cultivation with plots that lay fallow for most of the time (Austin 2008). It is virtually impossible to levy taxes upon
nomads or wandering farmers. As a result, the bulk of the revenues of African leaders came from trade in slaves,
ivory or gold; fiscal proceeds consisted mainly of export duties and tributes imposed upon neighbouring populations
(Herbst 2000, Lonsdale 1981, Thies 2007). These fiscal resources proved extremely vulnerable when Europeans
expanded their control over African territories and trade (Law 1989, Falola 1989). In addition, the logistic
advantages of the European military, based upon sturdy fiscal structures at home, secured regular funding for
(African) troops and the development of superior communication techniques (telegraph) that turned out decisive
time and again. A further problem was the sudden inflation after 1850 of the cowries, the dominant currency of
numerous African states, which directly affected the revenues of local rulers. Europeans had started to ship large
loads of these shells to Africa in exchange for African goods (Nwani 1975).

By contrast, the political economy of Ethiopia was much more robust. Its fiscal revenues stemmed mainly from
taxes on land. Moreover, effective control over territory and boundaries enabled the rise and persistence of powerful
institutions supported by writing and administration, just like in most advanced states in Europe and Asia. Trade was
less dependent upon cowries, since payment was made in gold, salt or iron. In the last decades of the nineteenth
century tax revenues were plentiful, which facilitated the defence against European incursions. These developments,
in turn, ultimately relied upon the advanced agriculture, which was based on a long-standing environmental

exceptionalism of the area vis-à-vis most other sub-Saharan societies. Ethiopian peasants were among the few

African peoples to have adopted the technology of the plough, and some areas even yielded two or three harvests per
year. The spread of domesticated crops and animals was substantial, and was facilitated by the temperate climate of
the Ethiopian highlands, which was closer to that of the Mediterranean than tropical Africa. This allowed for
irrigation and intensive food production and ensured a steady income from taxation (Pankhurst 1961, McCann 1987,
Crummey 1990). In short, state formation had been much more resilient and durable in Ethiopia than in most of Sub-
Saharan Africa, thanks to highly developed agricultural production and fiscal structures that facilitated the
maintenance of a permanent governmental administration.


Austin, G. (2008), ‘Resources, Techniques and Strategies South of the Sahara: Revising the Factor Endowments
Perspective on African Economic Development, 1500–2000’, Economic History Review 61 (3), 587–624, 600–01.

Crummey, D. (1990), ‘Society, State and Nationality in the Recent Historiography of Ethiopia’, Journal of African
History 31 (1), 103–19, 107–08.

Falola, T. (1989), ‘The Yoruba Toll System: its Operation and Abolition’, The Journal of African History 30 (1),
69–88, 70.

Herbst, J. (2000), States and Power in Africa: Comparative Lessons in Authority and Control, Princeton University

Law, R. (1989), ‘Slave-raiders and Middlemen, Monopolists and Free-Traders: the Supply of Slaves for the Atlantic
Trade in Dahomey c. 1715–1850’, The Journal of African History 30 (1), 45–68, 68.

Lonsdale, J. (1981), ‘States and Social Processes in Africa: a Historiographical Survey’, African Studies Review 24,
139–225, 177–78.

McCann, J. (1987), People of the Plow: an Agricultural History of Ethiopia, 1800–1990, Philadelphia: University of
Pennsylvania Press, 39–40.

Nwani, O. A. (1975), ‘The Quantity Theory in the Early Monetary System of West Africa with Particular Emphasis
on Nigeria, 1850–1895’, Journal of Political Economy 83 (1), 185–94, 191.

Pankhurst, R. (1961), An Introduction to the Economic History of Ethiopia from Early Times to 1800, London:
Lalibela House, 179–220.

Thies, C. G. (2007), ‘The Political Economy of State Building in Sub-Saharan Africa’, The Journal of Politics 69
(3), 716–31, 719.


Joerg Baten

In this volume, twenty-seven authors from many different countries and all world regions have jointly written a
history of the global economy. They have considered a set of development indicators for income, health (height),
education (numeracy), democracy and institutional quality that allowed the identification of periods of welfare
improvement or decrease in all world regions. Insights could be obtained into the economic history of Africa, Asia,
the Middle East and other world regions – important parts of the world that could not be studied using such a
comparative, non-Eurocentric and long-term development approach before. This global approach changes the way
we understand the economic history of the world.

What can be learned from this book? It is certainly impossible to summarize all the results regarding global
economic development of this volume in a short conclusion. The only strategy that we can follow – in order to round
up this volume – is to emphasize some recurrent themes that were discussed in several chapters. One of the most
fascinating findings was the large mobility between countries that developed faster and others that lagged behind. It
has often been overlooked by historical descriptions of Africa, for example, how some countries and regions
experienced growth spurts and rapid educational development during phases of their development. In west Africa
during the nineteenth century and again during late colonialism, the development of ‘rural capitalist’ peasants
(Austin) was quite promising, even if later civil wars and problematic institutional designs ended this. Similarly,
Poland and other parts of east central Europe experienced a period of surprisingly high welfare after inviting skilled
Jewish immigrants and setting constraints to the king in the sixteenth century (again, this governance system became
problematic later). These less well-known examples of development episodes are not as present in the historical
narratives because they later failed. However, failure was not always predetermined; economic history allows us to
identify the reasons for success and failure. In this volume, we also included the hitherto little discussed countries
and episodes of development.

A number of factors have been identified in the chapters as promoting or retarding growth, and these apply to
many of the historical cases discussed here. One factor about which many (but not all) scholars agree is the role of
inclusive institutions that encourage entrepreneurial talent and innovative ideas and ultimately stimulate growth.
However, it has proven difficult to install this set of institutions. For example, when Acemoglu and Robinson
published their book Why Nations Fail: the Origins of Power, Prosperity and Poverty in 2012, they introduced it
with the great hopes of the ‘Arab Spring’; the authors hoped that after removing extractive tyrants, inclusive
institutions would lead to higher welfare in the Middle East. However, it turned out that many Middle Eastern
countries did not follow this path but rather turned to civil war and religious struggles. Similarly, when eastern
Europe adopted seemingly growth-promoting, capitalist institutions in the 1990s, the scale of unwanted side effects
and backlash movements was shocking.

In contrast, for countries that had accumulated human capital over a long period, changes in institutions appear
to have been accomplished more easily, such as in South Korea after the end of its dictatorship phase or in Germany
after the end of national-socialism. Human capital consists of many different components, such as reading, maths
skills and other abilities. Recent research identified numerical skills as the most decisive human capital component
for economic development; therefore the authors of this volume studied numeracy intensively. For example, basic
numeracy was quite high in East Asia, and this fact might explain the growth of the world region during the last
century: first in Japan, then in South Korea, finally in China. Part of the decision about human capital investment is
exogenously driven by religious motivations as formulated in specific traditions (reading the Torah or Bible, for
example) or by the heritage of ancient traditions (as in the Chinese case). Specific views rather than the religion
itself are decisive; for example, the Jews were not exceptionally skilled before the Pharisee reformation in the first
century CE. The East Asian obsession for astrology and calendars kept numerical skills alive in a period when
income was low and schooling difficult to finance. Gender equality is also crucial here because it often had a strong
impact on the education of subsequent generations. Only educated mothers can provide home schooling.

In addition, an important determinant of development is the ability of the central government to tax. Several
authors described how the interaction between this ability and the constraints on the executive authority had an
influence on infrastructure and schooling investment. Ability to tax without constraints on the ruling powers leads to
increased levels of warfare in contrast.1 If a ruler did not need a justification of his expenses, he often overinvested
in military equipment and armies.

Of course, wars and civil wars were not only detrimental because less was invested in education and
infrastructure. Fishback addressed this issue using the example of the US during and after the Second World War.
He observed that some Americans have a misguided notion that wars are good for the economy. The Second World
War provided a counter-example. While of course the main losses of lives and physical capital took place in Europe,
the North American war production did ‘cost’ 40 per cent of overall gross domestic product (GDP) during the peak
period. After the Second World War, a substantial amount of GDP was used for cold war armament.

In the economic history of the last five centuries, colonial empires played an important role, and their economic
effect was repeatedly evaluated in the present volume. For example, Roy draws a multi-facetted picture of South
Asia during the colonial phase: while he finds that agricultural real wages (or grain wages) stagnated during this
period, he obtained the impression that some Indian historians overemphasized the colonial exploitation effects.
While agriculture tended in fact to stagnate during the colonial phase, this period was not only a ‘Dark Age’,
because in the urban centres there was a surprising diversification and development, for example. After
independence in 1947, GDP growth was faster, but productivity stagnated.

Finally, openness in labour and product markets was a recurring theme in this volume. However, while in the
last decades the effects were on average positive, trade openness did sometimes have adverse effects on poor
countries, as stressed for the Latin American case for the early twentieth century. Williamson described how the
developing world grew in the early nineteenth century, but its income increased less than that of western Europe and
North America. He identifies trade specialization and subsequent deindustrialization in some regions as a main
determinant of global inequality.

In conclusion, a substantial number of factors influences success or failure in certain periods and countries. Our
list of growth factors is certainly incomplete, but those mentioned above have played a role in a substantial number

of situations. Young adults deciding about their economic future, and policymakers and those that influence political
and economic decisions, can all improve welfare on this planet by gaining insights from economic history.


1. Fishback describes the North American success with constraining the executive.


absolutism 14 , 165 , 188
administration 351

socialism 227
war with US 99

African agency 342
age-heaping 7 –8
agricultural trade 257
Algeria 228

direct colonization 218
European settlement 220
growth 233
human capital 220
inequality and civil war 230
numeracy 219
OPEC cartel policy 230
pirate economy 213
socialism 227

American civil war 79
ancient civilizations 308

socialism 331
apartheid 334

height 131
immigration 137
income 137
independence 136
inequality 150
institutions 311
numeracy 163
population 131
real wages 60
trade 137

minorities in Middle Eastern economies 265

Asian Tigers 28 , 29 , 294
Ataturk reforms 226
Atlantic economy 14
Atlantic plantation system 321

agriculture 284 , 287
colonization 276
education 301
exports 296 , 303
geography 283
height 298
immigration 288
indigenous population 288
institutions 290
life expectancy 301
living standards 294
population 283
precolonial period 284
resources 121
trade routes 285
tribes 286
urban migration 293

Habsburg Empire 50

migration 60

autarkic policy regime 62
autocracy 290 , 323

Baltic trade 16

foundation 266
banking 15 , 20 , 25 , 30 , 40 –41 , 59 , 77 , 96 , 97 , 101 , 102 , 104 , 142 , 166 , 196 , 231 , 255 , 292
banking crises 40 , 96 , 142
banking system 40
Basel Committee 41

numeracy 50

emigration 23
European Economic Community 28
First World War 24

gold standard policy 26 , 63
Great Depression 25
growth 55
industrial exports 20
Industrial Revolution 13 , 19
women’s suffrage 26

socialism 331

biological standard of living 3 , 23 , 208 , 209
birth rate 91 , 105 , 336
Black Death 15 , 37 , 38

Spanish Empire 159
boom-bust cycles 135 , 334

growth 332
resources 159 –161

brain-drain 60 , 279

agriculture 134
exports 134
growth 134 , 137
height 131
immigration 137
independence 134
real wages 60
slavery 136 , 322
wage inequality 150

British act to abolish slave trade 322
British East India Company 260 , 286 , 287
bubbles 110
Buddhism 284
Burkina Faso

migration 325
trade 318

agriculture 284
colonization 287
culture 284
economic depression 290
ethnic groups 286
geography 283
immigration 288

migration 308
business cycles 26 , 139 , 140

Angkorian (Khmer) Empire 308
colonization 275
culture 284
ethnic groups 286
exports 303
French invasion 287
growth 304
height 298
immigration 288
independence 290
life expectancy at birth 299
migration 308
rubber 287
socialist economy 297
trade 296
Vietnam War 297
years of schooling 301

campesino communities 125

agriculture 94
banks 97 , 101
democracy 88
European colonization 84
growth 92
height 93
independence 87
migration 92
mobility 96
real wages 60
resources 85 , 121
settlement 89
social insurance 105
trade 85
universities 101

canals 95 , 253 , 308
capacity to tax 314
capital 120
capital accumulation 15 , 205 , 221

capital flows 30 , 139 –141 , 151 , 194 , 205
capital markets 15 , 25 , 269 , 296
caravan trade 215
cash crop revolution 325
cash-crop 221 , 235 , 325 , 335 , 340
catching up 22 , 57 , 294
cattle disease 225
chartered companies 14
chemical industry 57
children 4 , 62 , 74 , 84 , 85 , 91 –94 , 225 , 228 , 240 , 263 , 264 , 265

income level 137
inequality 150

coal mining 160
geography 167
growth 176 , 178 , 198 , 296
Industrial Revolution 196
manufacturing 296
maritime trade 284
migration 308
numeracy 354
nutrition 264
plan system 197
reform initiatives 197
seafaring trade 170
sex-selected abortions 243
Silk Road 219
trade 169 , 191 , 192
war with Japan 185
world exposition 202

Chinese model 198
cities 44 , 59 , 166
civil code/code civil 19
civil society 14
civil war 47 , 79 –80 , 133 , 168 , 190 , 217 , 233 , 353 –355
coal 18 –21 , 25 –29 , 89 , 95 , 96 , 159 , 161 , 185 –186 , 339
coal and steam 19
cocoa 325
cold war 99 , 355
collectivization 61 , 197

colonial structure 125

economic development 134
education 150

colonial trade 16

East Asia 216 –218 , 222
Europe 26
Latin America 122 –134 , 147 –150 , 166
South Asia 250 –269
Southeast Asia 287 –292
Sub-Saharan Africa 318 , 324 –331
US/Canada 84 –88
welfare effects 274 –277

commercial empires 14 , 15
commercial enterprise 82
commercial trading ports 50 , 284 , 288
commodities 139 , 144 , 176 , 193 , 196 , 251 , 252 , 257 , 285 , 287 , 296 , 309 , 320 , 330
commodity lottery 133
commodity price boom 144
commodity prices 122 , 139 , 142 , 144 , 151 , 153 , 334
commodity production 323
communism 61 , 99 , 188 , 217
competitiveness 26 , 63 , 66 , 112 , 116 , 222 , 230 , 279
concentration of political power 148

agriculture 336
colonization 329
currency 332

constitution 87 , 192 , 193 , 313
constraints on the executive 46 , 314 , 354
convergence 137
corporation 115 , 117 , 118 , 120 , 165 , 198
corruption 199 , 298
corvée 328
cost of coercion 324
cotton 25 , 52 , 85 , 94 , 131 –135 , 159 , 185 , 194 , 216 , 258 , 325 , 339
cowrie-and-gold-dust zone 321
credit 15 , 21 , 80 , 96 , 103 , 104 , 166 , 188 , 221 –222 , 254 , 258
crime 66 , 294 , 321
crop repertoire 320

income level 137
migration 137
slavery 322

Cultural Revolution 197
currency 25 , 63 , 79 , 87 , 101 , 151 , 158 , 193 , 293 , 320 , 332 , 351
currency integration 296
currency speculation 293
currency unions 205
curse of natural resources 77 , 158 , 230 , 235

Ottoman empire 51
Czech Republic

Habsburg Empire 50

political protests 66

dairy farming 283 , 287
death rate 91 , 265
definitions 81 , 262
deflation 25 , 26 , 61 , 63 , 96 , 112
deglobalization 61 , 138 , 302
democracy 2 , 8 , 9 , 21 –22 , 26 , 62 , 87 , 97 , 104 , 112 , 147 , 165 –166 , 231 , 246 , 290 –292 , 353
demographic changes 105 , 257 , 292
demographic transition 270 , 336

agricultural exports 19 –23
EEC 28
financial sector 25
free trade policies 23
political rights of women 245

dependency theory 316
developmental state 179 , 342
dietary transition 146
divergence 14 , 35 , 36 , 123 , 138 , 189 , 204 , 250
diverging inheritance systems 318
Dominican Republic 126 , 131
Dutch disease 29 , 134 , 332
Dutch East India Company 16 , 260 , 285 , 287 , 320

early growth paradox 23
ecological movement 65
Economic Commission for Latin America and the Caribbean (ECLAC) 146
economic crisis 117
economic liberalism 332
Ecuador 126 , 131
education 2 , 7 , 8 , 9 , 15

Europe 42 , 55
growth determinant 77
Latin America 148
Middle East 220 , 226 , 228
Southeast Asia 292 –293
US/Canada 101

Copts 222
growth 233
height 223 , 225
industries 227
infant-industry strategy 220
irrigation 211
life expectancy 233
literacy 228
Mohammad Ali Pasha reforms 217
Mongol invasion 210
oil extraction 228
OPEC cartel policy 230
property rights 213
socialism 227
trade, Ottoman Empire 216

electro-technical industry 57
empires 16 , 51 , 210 , 214 , 249 , 250 , 274 , 284 , 309 , 320 , 324 , 340 , 351
enclosure 21
energy prices 65 –66
Enlightenment 18 , 87
environmental obstacles 339
epidemics 338
Equatorial Guinea

exchange rate with franc 332

agriculture 318
colonization 352
environmental exceptionalism 324
imperialism 324
religion 320

Euro 104 , 105
Euro-African-type region 125
Euro-American-type region 125
European ‘Scramble for Africa’ 324
European Marriage Pattern 14
excess mortality 168

exchange rate 29 , 40 , 112 –113 , 134 , 158 , 296 , 302
export agriculture 335
export product concentration 142
export push policies 292
export-led growth 122 , 136
extensive agriculture 318
external prudential supervision 40
extra-subsistence production 320

famines 21 , 91 , 168 –169 , 266 , 267 , 337 –338
fertility 15 , 180 , 255 , 283 , 336 , 341 , 342
financial crisis 25 , 29 , 31 , 40 , 41 , 68 , 151 , 294 , 334
financial sector 25 , 101 , 103 , 196
financial stability 292
Finland 21

agriculture 23
growth 29
industrialization 23
Russian Empire 25
women’s representation 244

firms 115 , 117 , 119
first era of globalization 60 , 127 , 136
first modern economy 15
fiscal capacity 45 , 326
fiscal policy 102 , 112 , 113
fiscal resources 351
fiscal sustainability 151
food security 343
foreign capital 292 –293
foreign direct investment 193 , 194
foreign investment 327

Algeria 220
colonies 275
education 74
emigration 84
European Economic Community 28
First World War 24
Francois Mitterand 30
gold standard policy 63 , 112
growth 21
Industrial Revolution 19
institutions 22

monetary policy 25 , 112
Sykes-Picot Agreement 227
Vienna Congress 19

freedom 115 , 163
French Revolution 4 , 19

gender equality 240 , 243 , 354
geography and welfare 311

interaction with Ottoman and Persian empire 51

agricultural tariffs 57
anti-Semitism 227
Axis nations 80
coal mining 160
colonies 275
ecological movement 65
education 74
emigration 91
global economic crisis 66
gold standard 112
Great Depression 61
growth 57
industrial capacity 63
international trade 23
migration 60 , 64
modern industry 19
national socialist trade policy 62
reparations payments 96
the Wall 99

agricultural economy 330
agricultural exports 325
cocoa industry 340
currency 332
development policy 334
economic cycle 332
European imperialism 324
height 337
infant mortality rate 338
migration 325
plantations 339
slave trade 320

globalization 23 , 60 , 63 , 96 , 127 , 139 , 144 , 149 , 178 , 198 , 199 , 205 , 253 , 256 , 257
Glorious Revolution 312
gold standard 25 , 62 , 63 , 96 , 112 , 205
Golden age 15 , 36 , 46 , 63 , 68 , 138 , 243 , 292
governance 284 , 290 , 304 , 353
government expenditures 185
grain invasion 57
Great Britain

Atlantic economy 14
colonization 16
constitution 313
gold standard 96 , 112
growth 21 , 36
India 250 , 252 , 256 , 266
industrial exports 20
Industrial Revolution 18 –19 , 118 , 159
institutions 38
labour market 38
literacy 74
Little Divergence 35

Great Depression 29 , 61 , 62 , 94 –98 , 101 , 104 , 110 , 140 , 178 , 193 –196
Great Divergence 35 , 36 , 204 , 205
Great Leap 197

financial crisis 66
numeracy 51
sovereign debt 105 , 113
youth unemployment 66

green revolution 340
growth theory 74
growth-conducive institutions 310
guano boom 132

exchange rate with franc 332
socialism 331

hacienda 127

development 4

colonies in Southeast Asia 276 , 298
colonies in Sub-Saharan Africa 275
concept 3 –6

East Asia 189
effect of colonialism 274
Europe 23 , 55
Latin America 131
Middle East 223
South Asia 276
Sub-Saharan Africa 337
US/Canada 93

hierarchies 165
high-technology manufacturing exports 142
Hindus 265 , 284
holocaust 62
Hong Kong 292

Treaty of Nanking 191
human capital 15 , 22 , 52 , 149 , 178 , 212 , 328

Europe 42 , 51 , 52 –55 , 190
growth determinant 77
Latin America 148
Middle East 213 , 219 , 226 , 228
South Asia 279
Southeast Asia 220 , 292 –293
US/Canada 101

Human Development Index (HDI) 50

Habsburg Empire 50
political protests 66

IMF aid 296
immigration policy 60
immiseration model 254
imperialism 188 –192 , 200 , 287 , 324
import substitution 293 , 298 , 329 , 341
Inca Empire 163
income elasticity of demand 146
indentured labourers 137
Independence 125 , 331

agricultural wage 261
brain-drain 280
British East India Company 251
colonial trade 250
culture 308

European products 61
export of opium 191
globalization 253
growth 36 , 176 , 267 , 296
health 265
height 276
history of colonialism 251
industrialization 253 , 256
inequality 258
influence on Southeast Asia 284
living standards 260
migration 137 , 288
national income 254 –255
nutrition 263
postcolonialism 266 , 267
productivity 258
railways 258
relation with Great Britain 253
sex-selected abortions 243
trade 215 , 251 , 266 , 309
trade openness 39
wages 260 , 262
women’s marriage age 243

indigenous institutions 317
Indios 163
indirect rule 326
Indo-European-type regions 125

agriculture 284
Dutch East India Company 287
economic depression 290
exports 303
financial crisis 295
geography 283
growth 197 , 292 , 304
height 298
independence 290
Islam 284
life expectancy 299
population 283
urban migration 293

industrial districts 27 , 118

industrial policies 153 , 179 , 227
Industrial Revolution 8 , 13 , 15 , 19 , 26 , 42 , 52 , 53 , 118 , 120 , 149 , 159 , 189 , 204 , 339
industrialization 342
inequality 3 , 18 , 26 , 28 , 68 , 77 , 85 –86 , 122 , 136 –137 , 148 –152 , 158 , 163 –165 , 177 , 208 , 214 , 216 , 226 ,

240 , 246 , 250 , 253 , 256 , 266 , 277 , 288 , 298 , 321 , 335 , 355
inflation 102 –104 , 142 , 151
information and communication technologies 66
infrastructure 22 , 25 , 63 , 192 , 214 , 253 , 294 , 297 , 301 , 354
innovation 40 , 74 , 83 , 95 , 100 , 117 , 159 , 192 , 197 , 215 , 310 , 336
institution 1 , 9 , 13 –14 , 17 , 19 –22 , 27 –28 , 38 , 41 , 44 , 52 , 64 , 66 , 79 , 81 , 87 , 106 , 117 , 133 , 136 , 144 , 149 ,

152 , 159 –161 , 165 , 178 , 191 , 196 –199 , 204 , 205 , 213 , 216 , 221 , 240 , 258 , 266 , 270 , 279 , 282 ,
284 , 290 , 304 , 310 , 311 , 314 , 316 , 318 –319 , 340 , 341 , 351 –354

interest rates 15 –16 , 66 , 96 , 102 –103 , 104 , 112 , 113 , 293
international expositions 202
international relations 125
interventionist state 179 , 217 , 292
invisible hand 119

economic and social development 231
growth 223
height 223 , 276
Iran–Iraq war 233
minorities 222
nomadic invasions 214
oil 228
OPEC cartel policy 230

economic and social development 231
growth 231
height 223 , 224
invasion 210
Iran–Iraq war 233
oil 228
OPEC cartel policy 230
Ottoman Empire 210
property rights 213
socialism 227
Sykes–Picot Agreement 227
wars with the US 99

emigration 7 , 23 , 91
European integration 28
growth 21 , 27

harvest failure 23
inequality 30

iron industry 19 , 27
iron production 63
irrigation 213 –214 , 217 , 253 , 308 , 352
Islam 221 , 226 , 240 , 284 , 323

economic and social development 231
height 223
immigration 227
OPEC cartel policy 230
years of schooling 228

Axis nations 80
economic development 14
education 42 , 45
European Economic Community 28
gold standard policy 63
growth 18 , 52 , 176
Habsburg Empire 50
human capital 52 , 68
immigration 42
income level 42 , 43
industrial growth 52
migration 134
national income 45 , 68
regional differences 50 , 52
youth unemployment 66

itinerant pastoralism 320
Ivory Coast

economic cycle 332
taxation of export 335

agricultural progress 169
Black Death 38
daimyo 170
exports 61
female empowerment 243
government intervention 185
Great Depression 290
growth around 175
growth during 28

growth during Tokugawa period 174 , 175 , 177
growth slow-down 296
height 189
industrialization 179 , 180
literacy 177
Little Divergence 36
living standard 185
McNeillian trap 168
migration 93
modern economic growth 178
nuclear bombs 99
numeracy 177 , 354
silver exports 169
social insurance 105
trade 169
trade openness 39
warlords 169
world exposition 202

Jewish immigration 46
Jewish religion 76

Sykes–Picot Agreement 227

military resistance 219
nutrition 219

currency 332
height 337
market 325
taxation of exports 335

Keynesian policies 29 , 64 , 102 , 104
Khmer Rouge 297
kingdom of Buganda 323
kleptocracy 332
knowledge 1 , 100 , 110 , 167 , 191 , 205 , 209 , 321

Asian Tigers 292
communism 99
growth 28 , 178
Korean War 293
labour force 186
seafaring trade 170

world exposition 203

development 231
invasion in 99
OPEC cartel policy 230

cash-crop economy 235
numeracy 218

labour market 6 , 15 , 29 , 38 , 60 , 125 , 150 , 185 , 257 , 260 , 261 , 325
labour productivity 18 , 26 , 255 , 256 , 258 , 339 , 340
labour scarcity 340
land inequality 15 , 50 , 52 , 77
land markets 15 , 166
land taxes 192
land–labour ratios 60

Angkorian (Khmer) Empire 308
culture 284
exports 303
French invasion 287
growth 304
height 298
immigration 288
independence 290
Indochina Wars 297
institutions 290
life expectancy at birth 299
migration 308
socialist economy 297
standard of living 294
trade 296
years of schooling 301

large landholders 148

numeracy 50
laws 19 , 81 , 88 , 93 , 221 , 235 , 252 , 288

banking 231
Christians 222
development 223 , 233
economic and social development 231

growth 231
height 223
property rights 213

legislative reform 266
legitimate commerce 323

defensive state 324

colonization 351

growth 233
height 225
oil revenues 233
OPEC cartel policy 230

life expectancy 3 , 48 , 66 , 123 , 197 , 225 , 233 , 298 –304
literacy 7 , 15 , 42 , 51 , 55 , 74 , 77 , 177 , 197 , 228
Little Divergence 14 , 35 , 36
long-distance trade 39 , 174 , 284 , 319

macroeconomic crisis 110 , 267
malaria and welfare 311
Malawi 327

agriculture 284
economic development 293
economic policy 295
exports 303
growth 294
height 298
immigration 288
independence 290
Islam 284
migration 308
rubber 287
standard of living 293 , 304
trade 284
urban migration 293
years of schooling 301

Empire 351
migrant labour 325

malnutrition and cognitive abilities 77

Malthusian 32 , 38 , 74 , 174
management 116
manufacturing 329
maritime trade 169 , 309
market economy 32 , 63 , 66 , 174
marriage age 14 , 38 , 242
Marshall Aid 28
Marxism 166 , 253 , 258 , 270 , 274

colonization 274
immigration 279

medical science 92
Meiji period 178
Meiji Restoration 167
mercantilism 285 , 287
merchant adventurers 170
mestizo campesinos 150
Mexican peso 79

economic development 133
education 150
Mexican–American War 89
Spaniards 85
Spanish Empire 159 , 163
wages 163

migration 7 , 21 –22 , 46 , 60 , 64 , 84 , 91 –94 , 105 , 125 , 134 , 137 , 145 , 166 , 204 , 227 , 250 , 261 , 266 , 279 ,
288 –289 , 308

military dictatorships 150
mineral exports 335
mining industry 341
MITI 178 –179
modern economic growth 15 , 19 , 178 , 196
monetary independence 331
monetary policies 25 , 62 , 102 , 112 , 253
monetization 189
Mongol invasion 210
monopoly 95 , 166 , 191 , 210 , 228 , 284 , 324 , 331
monopsony 325

development 237
independence 210

socialism 331

multi-divisional company 119

colonization 275
geography 283
height 298
independence 290
institutions 290
life expectancy at birth 299
poverty 296
standard of living 294
trade 296
years of schooling 301

Napoleon 4 , 19 , 77 , 89 , 149 , 288 , 313
national socialists 62
nationalism 80 , 253 , 254 , 260 , 266 , 270 , 290
nationalized economy 297
nationalized industries 63 , 226
natural and human resources 317
natural rate of economic growth 334
natural resource 77 , 83 , 85 , 106 , 121 –122 , 139 , 151 , 158 , 159 , 160 , 235 , 317
natural-resource-based production 121
neo-institutional 165
neo-liberal 29 , 30 , 31

democracy 28
‘Dutch disease’ 29
economic development 312
emigration 23 , 84
European Economic Community 28
financial sector 25
First World War 25
gold standard policy 26
growth 15 , 21 , 27 , 313
land market flexibility 15
Little Divergence 14
Second World War 26
technological change 26
women’s marriage age 243

New World crops 189
New Zealand

agriculture 283 , 287

education 301
exports 296 , 303
geography 283
height 276 , 298
immigration 288
institutions 290
life expectancy 301
living standards 294 , 302
resources 121
settler colony 276
trade routes 285
tribes 286
urban migration 293

export concentration 142
growth 128
volatility 140

agriculture 320
trade 318

agricultural exports 325
agriculture 325
height 4
industrialization 329
oil exports 332
resources 158
slave trade 320
Sokoto Caliphate 323
trade 318

emigration 23
financial sector 25
growth 21
oil 30
political rights of women 245
resources 159 –161
shipping 23

Europe 50 –55 , 190
growth determinant 77
Latin America 163

Middle East 213 , 218 , 219 , 220
South Asia 279
US/Canada 101

oil crisis 28 , 29 , 178 –179
oil extraction 228

oil 233
OPEC cartel policy 230

Omani dynasty 322
OPEC 28 , 102 , 230 , 332
Opium War 191

division of India and Pakistan 266
growth 197

height 223
Sykes-Picot Agreement 227

Canal 137

Papua New Guinea 283
Australia 290
economic development 304
geography 283
heights 298
life expectancy 301
original inhabitants 308
trade 296
tribes 286

parliament 14 , 21 , 39 , 42 , 46 , 87 , 193 , 240 , 244 –246 , 312 , 329
pastoral economies 323
patrimonial linkages 351
peasant colonies 324
pepper 285 –286

economic development 131
height 131
migration 137
Spanish Empire 159 , 163

agriculture 284

colonization 287
exports 303
geography 283
growth 304
independence 290
Islamic and Christian influence 284
life expectancy 299
standard of living 294 , 297
tribes 286
urban migration 293

Phillips curve 102
pirates 213 , 248
plague 45 , 210 , 211 , 235
plan system 197
plantation/concession-colonies 324
plantations 137

economic development 353
gold standard policy 63
Habsburg Empire 50
political protests 66
real wages 46
Second World War 63
standard of living 43
taxation 314

political centralization 326
political fragmentation 340
political freedom 274
political institutions 17 , 106 , 165 , 310
political reforms 166
population density 44 , 46 , 55 , 172 , 211 , 224 , 225 , 283 , 320
population growth 91 , 123 , 167 , 170 , 191 , 332

commercial empires 14
democratization 65
ecological movement 65
human capital 68
income level 68
migration 60
revolution 331
trade routes 17 , 38
youth unemployment 66

Prebisch–Singer thesis 144
precious metals 285
precolonial economies 322
price revolution 18
private entrepreneurs 14 , 57 , 227
production capacity expansion plan 186
productivity 267
proletarianization 15
property rights 22 , 39 , 81 , 83 , 88 , 149 , 165 , 213 , 288 , 304 , 317 , 341
protectionism 63 , 132 , 144 , 230 , 335
protestant confession 77
proto-industrial activities 19 , 172 , 174 , 180 , 183 , 214
public goods 3 , 214 , 258 , 269
public health 91 , 105 , 197 , 225 , 264 , 265 , 274 , 275 , 338

development 231
growth 231
life expectancy 233
OPEC cartel policy 230

Quantity–quality trade-off 77

railway 57 , 81 , 82 , 90 , 95 , 117 , 119 , 192 , 193 , 196 , 226 , 251 –259 , 264 , 288
rational-choice 316
real incomes 338
real wages 17 , 24 , 46 , 60 , 68 , 150 , 163 , 189 , 208 , 223 , 261 , 274 , 325 , 328 , 342 , 355
record keeping 288
redistribution 57 , 81
reformation 18 , 22 , 354
relative price 23 , 77 , 264
religion 50 , 166 , 221 , 246 , 249 , 284 , 323 , 354
rent-seeking 335
research and development 26 , 115
resource-based economic strategy 136
retreat from world trade 269 , 290
right of ownership 81
rights to land 328
roads 214

Habsburg Empire 50
rubber 287

agriculture 48

brain drain 60
development 47
education 50
Finland 25
growth 57
human capital 218 , 219
hyperinflation 79
income level 53
numeracy 55 , 219 –220
nutrition 48
property rights 82
public investment 57
regional differences 50
slavery 216
socialism 61
taxation 314
territorial expansion 51 , 218 , 219 , 235

migrant labour 325
political rights of women 245

sanitation 169
Saudi Arabia

life expectancy 233
oil 233
OPEC cartel policy 230

seclusion policy 172
second serfdom 46 –47 , 48 , 68
selectivity of migrants 60

migrant labour 325
pre-independence 330

services sectors 146
settler colonies 276
settler economies 324
settler mortality 311
sex ratio 243 , 246
sheep 94 , 163 , 225 , 284 , 287
shipping 15 , 22 –23 , 45 , 192
sick man of Europe 235
silk 172 , 176 , 189 , 216 , 222
Silk Road 219
silver mines 132 , 169

Asian Tigers 292
colonization 286 , 287
commercial trading ports 288
geography 283
growth 288
life expectancy 301
living standards 294 , 302 , 304
Malaysia, separation from 290
population 283
trade 303
urban migration 293
years of schooling 301

skilled labour 18 , 150 , 260 , 335 , 341
skills 92 , 151 , 180 , 217 , 220 , 228 , 253 , 256 , 288 , 354

Habsburg Empire 50
smallpox 163 , 168
social insurance 88 , 104 , 105

Italian invasion 338
slavery 323

South Africa 327
apartheid 334 , 341
Black Empowerment 336
cash crops 342
colonization 274
gold mining industry 325
height 277
immigration 279
independence 327
industrialization 329
infant mortality rate 338
manufacturing 329
migrant labour system 334
migration 279
numeracy 279
political rights of women 245
racial discrimination 335
royalties 327
settler colony 276
slavery 279 , 323

wages 325 , 339
South Korea

growth 64 , 204
human capital 354
numeracy 354

sovereign debt 104
Soviet-style socialism 61

Black Death 38
colonies 165
commercial empires 14
democratization 65
ecological movement 65
emigration 84
growth 176
human capital 52 , 68
income level 42 , 43 , 68
migration 60
reconquest 159
regional differences 52
taxation 80
trade routes 17 , 38
youth unemployment 66

Sri Lanka
human capital 279
women’s representation 244

stagflation 65
standard of living 42

Australia 289
institutional impact 310
Italy 46
Japan 172
Malaysia 293
Middle East 214
north-western Europe 23
Poland 43
Southeast Asia 284
United States 95

state enterprises 14 , 198 , 269
state formation 170 , 318
state intervention 331
state-led industrialization 122
stateless societies 321

state-owned companies 198 , 228 , 267
steam 18 –19 , 159 , 192 , 205 , 252 , 288
stock market 31 , 96 , 102 –104
structural adjustment 331
structural change 63 –64 , 146 –147 , 176 , 196 , 255 , 327 , 335
sub-periods of colonial rule 330

agriculture 336
jihadism 323

democracy 28
emigration 23
financial sector 25
growth 21
industrialization 23
technological change 26
welfare state, development of 27

Switzerland 19 , 52 , 59 , 63
gold standard policy 63
Industrial Revolution 19
production diversification 52
service sector 59

Christians 222
height 223
numeracy 212
property rights 213
socialism 227
trade 216
trade routes 215

Asian Tigers 292
growth 178
height 189

colonial mechanization 339
height 337
slavery 323
socialism 331

Tanzimat reforms 216 , 220
tariff 28 , 57 , 89 , 96 , 192 , 198 , 205 , 267 , 295 , 302
tax burden 87 , 216

tax evasion 214
tax farming 216
tax revenues 351
taxation 14 , 50 , 79 –80 , 174 , 213 , 216 , 249 , 323 , 331 , 335 , 352
technological change 15 , 26 , 139 , 150 , 324
technology 63 , 119 , 120 , 142 , 151 , 169 , 192 , 202 , 209 , 225 , 233 , 243 , 288 , 318 , 324 , 351
telegraph 19 , 196 , 351
terms of trade 135
textile industry 19 , 45 , 52 , 217

colonization 275
culture 284
ethnic groups 286
exports 303
financial crisis 296
geography 283
growth 293 , 294 , 304
height 276 , 298
military coup 290
rice fields 287
service sector 180
urban migration 293

development 4

Tokugawa period 168
Tongzhi Restoration 191
total factor productivity 341
trade liberalization 29
trade networks 318
trade openness 292 –293 , 302 , 355
trade routes 37 , 38 , 45 , 52 , 84 , 210
trade specialization 121
trade union 27 , 28 , 29
trading commodities 16
tragic optimism 318
transaction costs 19 , 22 , 66 , 196
transport 19 , 23 , 25 , 45 , 57 , 60 , 95 , 102 , 177 , 196 , 205 , 216 , 255 , 279 , 288 , 325 , 331
trans-Saharan trade 319
Treaty of Waitangi 288
treaty port 191 , 192

pirate economy 213

economic and social development 231
entrepreneurs 226
gender equality 226
growth 223
height 223 , 224
industries 227
life expectancy 225
minorities 222
numeracy 212
reforms, Ataturk 226

height 223

agricultural exports 325
currency 332
development policy 334
migrant labour 325
overseas market 339

Uitenhage massacre of 334

communism 61
unemployment 25 , 29 , 57 , 61 , 96 –97 , 102 , 103 , 112 , 253
United Arab Emirates

OPEC cartel policy 230
United Kingdom

agricultural import 23
coal price 160
democracy 28
devaluation 63
education 42
European integration 28
financial industry 30
First World War 25
growth 21 , 27 , 55
Industrial Revolution 13
inequality 30
political change 29
Second World War 26
service sector 58
women’s marriage age 243

United States

automotive industry 115
banks 101
Cold War 99
corporate structure 115
defence spending 99
democracy 88
demography 105
Depression 97
economic expansion 89
education 74
farm population 90
firm structure 115
gold standard 96 , 97 , 112
growth (early nineteenth century) 94
growth (late nineteenth century) 92
Gulf wars 231
height 4 , 93
housing boom 96
immigration 93
impact of wars 354
income level 146
independence 149
industrial sector 93
institutional settings 310
institutions 311
labour unions 95
migrant stock 60
migration 21
mobility 96
monetary and fiscal policy 113
Native Americans 84
real wages 60
recession 103
resources 85 , 121
revolution 87
Silver Purchase Act of 196
social insurance 105
social security 105
steel capacity 95
universities 101
War on Terror 99

unskilled labour 92 , 148 , 294
urbanization 14 , 18 , 24 , 44 , 150 , 167 , 209

income 137
inequality 150

Cold War 99
defence spending 99
education 61 , 64
growth 64
income 65 –66
industrial growth 63
policy change 66
socialism 227
Sputnik shock 65 , 74

numeracy 219

education 150
growth 137
resources 158

agriculture 284
Angkorian (Khmer) Empire 308
communism 99
Confucian values 284
ethnic groups 286
exports 303
external investment 297
French invasion 287
growth 304
height 298
immigration 288
independence 290
life expectancy at birth 299
migration 308
postwar economy 297
rubber 287
standard of living 294
urban migration 293
Vietnam War 276
years of schooling 301

volatility of growth rates 139

wage labour 15 , 163 , 318
waqfs 221
War of Independence 131
war reparation obligations 61
water power 19
welfare state 27 , 28 , 30 , 104
wheat 57 , 85 , 94 , 146 , 258 , 260 , 261 , 287
wine 322
World War 24 , 29 , 61 , 63 , 68 , 79 , 93 , 95 –98 , 104 , 119 , 140 , 144 , 158 , 178 –180 , 226 , 227 , 290

coffee 210
entrepreneurs 226
growth 231
height 223
years of schooling 228

ecological movement 65
education 64
growth 64
Habsburg Empire 50
income 64
socialism 64

Zaire (former)
economic contraction 332

Zambia 327
economic contraction 332

Zimbabwe 327
settlement 320

Zulu monarchy 323


History of Africa

• Africa was highly agriculture based, but also
engaged in trade with the Muslim world

• Many eastern towns developed cultural ties, trust,
and trade networks following their adoption of

• African Trade Slave began in modern-day Nigeria
with Portuguese traders

• 1680-1800→slave trade skyrocketed as the Atlantic
plantation system developed → Slave raiding
became a business that prevented growth and
escalated internal conflicts

European “Scramble for
Africa” 1880-1960

• 1884 and 1885, the Berlin Conference
formalized European colonization of Africa.

• Prior to this time, world superpowers such as
Portugal, France, and Britain had already set
up colonies in Africa & to a smaller extent,
Germany and Italy

• By 1900 majority of the land in Africa was
divided up amongst seven different European
colonizing nations: Britain, France, Spain,
Germany, Belgium, Italy, and Portugal.

Africa was divided into settler colonies and native colonies

Settler economies:
• most local land was reserved for European use

• Labor scarcity> governments of settler economies embarked on policies aimed at driving Africans out
of the produce market and on to the labor marketEmphasis on cash crop agriculture like peanuts, cocoa
beans, some sugar
• growth of exports of agriculture allowed the formal abolition of slavery to become an economic and

social reality, by providing opportunities for former slaves as hired laborers

“Native” colonies (peasant colonies) were reserved for Africans but exploited by European companies
Africans retained almost all the land > expansion of export agriculture by African producers > demand
for labor created by this expansion attracted seasonal migrants into the cash crop zones from areas that
lacked the soil (ex. Labor from Rwanda to Uganda for cotton production)

African economies from 60s –present

• intensification of the trend of state intervention in African economies
• 1973 & 1978 oil crises

1960s and 1970s

• structural adjustment in 1980s → transition to market economy
• incomes per capita in sub-Saharan Africa grew
• advances in education & health
• environmental obstacles to agricultural intensification remained costly


Market Liberalization
after 1980

• Spending on health and education were low,
leading to incredibly low growth on the continent

• 1994, the African franc was devalued about 50%
to assist the non-French countries with exports

• Led to increased investment in raw materials,
such as oil in Congo and gold in Mali

• Benefitted exporting nations

• After South African apartheid ended, growth
skyrocketed until stagnation following 2008

• African Union founded in 2000

CFA Franc Zone
• African Financial Community founded

in 1994, hosts East African and
Economic Union Countries.

• encouraged exports , but export
policies were not coupled with
structural policies

• CFA Countries have grown about 5%
each year since 1994 until 2021

explanation for Africa’s history of poverty

The two stands of external explanation for Africa’s history of poverty:
1. Dependency Theory

2. Rational Choice focusing on the way resources are controlled, organized &
exploited→Approach pioneered in African studies by Robert Bates, examines how
far the private interests of rulers align with those of the population as a whole→
rulers stand to gain by rewarding themselves and their supports at the expense of
general prosperity.

Both interpretations are Euro centric, attributing Africa’s fate to Europeans

Internal Explanation: factor endowments framework

1. most of sub-Saharan Africa was land abandoned and labor scarce
2. extension of food was constrained by the supply labor
3. relatively plentiful land was resistant to intensive methods of agriculture: soils were thin and

therefore easy eroded, animal diseases such as sleeping sickness prevented or inhibited the
use of large animals over much of the continent

4. Seasonality: distribution of rainfall over the year in much tropical Africa limited the productive
uses of land during some months of the year.

5. resource characteristics account for choices of technology, such as the preference for extensive
rather than intensive use of land.

6. diverging rather than converging inheritance systems,
7. reliance on coercion as means of recruiting labor from outside the household

Reasons for Africa’s stagnant growth: conflict, corruption & others

• Africa has experienced 200 wars & ethnic conflicts since 1800
• Weak institutions
• Governments taxed agriculture exports, even when this discouraged farmers from

• corruption, misallocation of resources
• foreign exploitation
• Low private investment
• Underdeveloped regional markets

Bad governance in many African countries has also contributed to the
economic damage

• Lack of institutions
• corruption
• Inefficient utilization of resources
• Poor or no access to capital
• Dormant regional capital markets
• Lack of employment for educated human capital
• Low levels of private investments
• Inappropriate economic policies

China’s Belt and Road
Initiative in Africa

• China has made over 3,600
investments in Africa since 2000

• investments focus on infrastructure
(roads, railways, ports), finance,
medical investments, and natural

• Raises concerns about loss of African
sovereignty and debt trap

Russian Mercenaries
in Africa

• Russia has made about 200 investments in
Africa since 2000,→ focusing on natural
resource extractions

• Russian mercenaries have been hired by
officials in Central African Republic in
exchange for mining concessions

• Mercenaries have also appeared in Sudan,
Libya, Madagascar, and Mozambique→
violence, and exploitation in vulnerable
African countries

North Africa


• much of the northern part of Africa,
including a large portion of Sahara,
excluding Egypt and Sudan, located in
the Mashriq — the eastern part of the
Arab world

• 6.05 million km²
• about 104.75 million people

Maghreb Countries in 17th & 18th c

• The coastal strip of North Africa enjoyed peaceful existence up to the 15th and 16th
centuries when the Berber dynasties declined

• The Ottoman Empire for a period controlled parts of the region.

• Complicated institutional Structure
• No rule of law
• taxation capability was low
• ruler’s ethnic background differed from those of the ruled

• In Algeria and Tunisia an important additional element was the economy created by a tradition of
holy war again the Christians→ “pirating” developed into an industry for the Algerian and Tunisian
port cities. Ships whose owners were not willing or able to pay a substantial fee were captured, and
the surviving personnel sold on slave markets if ransom was not paid.

Magrep Countries in 19th c & 20th c

• European powers began taking over parts of the Maghreb.
• France eventually became the dominant colonial power in the region.
• Spain had seized territory in present-day Western Sahara &e northern coast of

• Libya was the first country in the region to gain independence, followed by

Tunisia and Morocco.
• Algeria gained independence in 1962, following a bloody revolt against French

• Spain withdrew from Western Sahara in 1976, after which Morocco immediately

claimed sovereignty over it, a claim that was rejected by people leading to armed
resistance→ conflict remains unresolved

Magrep in 21st c
• social turmoil that accompanied the Arab spring transitions & Libyan conflict &
failure to implement structural reforms →growth performance of the Maghreb
countries suffered since 2011
• Morocco and Tunisia are the two countries in the Southern Mediterranean with

which the EU is developing stronger links, both in terms of trade agreements and
EU financial assistance

GDP of Magrep Countries (Statista 2022)
In 2020, estimated GDP of all Maghreb countries amounted to $ 328.74 billion.

Ø Population
Algeria most populous
with about 43.8 million
Morocco with 36.9 mil
Tunisia 11.8 mil
Libya 6.8 mill
disputed enclave of
Western Sahara is
less than 600,000
people living in it.

Arab Maghreb Union
• Algeria, Libya, Mauritania, Morocco, and Tunisia established the Arab Maghreb

Union in 1989 to promote cooperation and economic integration in a common

• envisioned initially by Muammar Gaddafi as a superstate.
• union included Western Sahara implicitly under Morocco’s membership, ended

Morocco’s long cold war with Algeria over this territory.
• progress was short-lived, & union is now dormant



abundant natural resources including oil, gas, solar energy, iron, zinc, lead, silicon, and

country is classified as an upper middle-income country

heavily dependent on oil and gas as its main source of income→ 60% of budget
revenues & 34% of GDP

heavy reliance on the hydrocarbon

• main problem with the Algerian economy is the heavy reliance on the hydrocarbon

• Although there are many other sectors of the economy that could be developed,
political instability has kept foreign investors away.

• Algeria adopted a new constitution in 2016, which establishes the promotion of a
diversified and more market-based economy.

• the government started working on a strategy to reshape the country’s growth model,
with World Bank support. The aim is to reduce the dependence on hydrocarbons.


• used to be a highly centralized economy, focused on import
substitution under President Gamal Abdel Nasser (1954–1970)

• rule of President Abdel Fattah el-Sisi (2014–present), the economy
follows Egypt’s 2030 Vision

• structural reforms (including fiscal and monetary policies,
taxation, privatization and new business legislation)

• move towards a more market-oriented economy and prompted FDI
• economy became 36th in worldwide ranking as of 2021

Sub-Saharan Africa

Key Indicators
Nominal GDP: $2.6 trillion (2019)

GDP Per Capita: 1,970 (2020)

Birth Rate: 3.24 per 100 people → expected to double in 2036

3.000 Distinct Ethnic Groups

Mixed populations of Christians, Muslims, and traditional religions

Agriculture and the Rural

• dependence of rain-fed agriculture
• Low irrigation usage
• Limited institutional support &

public investments
• inadequate human capital due to

skills and knowledge shortage


• South Africa manufacturing reached 10% of GDP> development of manufacturing in South Africa,
Southern Rhodesia and the Belgian Congo owe to their mining sectors.

• European firms sought to preserve their markets by establishing factories before Independence

• South Africa and southern Rhodesia > settler dominated parliaments gave governments the
mandates to pursue import substitution industrialization, from 1924 and 1933.

• FDI→ only mines attracted large flows of capital & 42.8% of FDI in South of the Sahara went to
South Africa

Sub-Saharan Africa following COVID-19

• Africa has been steadily declining in GDP growth rate since 2008 & COVID-19 accelerated
it → World Bank expects GDP growth rates to return to pre-COVID levels by 2025

• Lack of access to vaccines decreased foreign investment
• Human rights situation continues to deteriorate
• Ethnic conflicts
• War in Central African Republic
• Threat of ethnic cleansing in South Sudan


• Fox, S. (2014). The political economy of slums: Theory and evidence from Sub-Saharan

Africa. World Development, 54, 191-203.
• Anlesinya, A., Adepoju, O. A., & Richter, U. H. (2019). Cultural orientation, perceived

support and participation of female students in formal entrepreneurship in the sub-
Saharan economy of Ghana. International Journal of Gender and Entrepreneurship.

• Benson, C., & Clay, E. J. (1998). The impact of drought on sub-Saharan African economies:
a preliminary examination (Vol. 401). World Bank Publications.

References (cont.)










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Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

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Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.