M
iddle East

M
iddle East

site of the w
orld’s earliest

civilizations and the
birthplace of three great

religions–Judaism
,

Christianity, &
Islam

area com
prises

m
ountains,deserts, fertile

plains irrigated by grand
rivers, and

seacoasts.

Clim
atically, the M

iddle East
ranges from

the tem
perate

M
editerranean coast, to the

extrem
e

heatof the
arid

desertareas, to snow
y

m
ountains.

Countries in the M
iddle East

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

ait, Lebanon, O
m

an, Palestine, Q
atar, Saudi

Arabia, the Syrian Arab Republic, Turkey, the U
nited

Arab Em
irates &

Yem
en.

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

•
M

edieval plague &
M

ongol invasion hit the M
iddle Eastern econom

ies

Caravan trade

•
M

ain caravan routes w
ithin the O

ttom
an Em

pire (route w
ent East -W

est in southern and
northern A

natolia), connected Syria and M
esopotam

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

cost.

•
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
s

•
Black slaves from

A
frica w

ere traded northw
ard, and w

hite slaves from
Russia and

Balkans w
ere traded Southw

ard.

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
plem

ented by the food
processing, furniture and specialized industries

•
M

ilitary interest of the O
ttom

an Em
pire > Turkish arm

am
ent producers and ship builders

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

Form
ation of Em

pires

•
During the m

edieval period, the technology of the
M

iddle East w
as superior to that of Europe &

know
ledge

w
as flow

ing from
the form

er to latter including m
edical

know
ledge> but in 18

thc things reversed →
M

iddle
Eastern governm

ents and fam
ilies underinvested in

education.

•
O

ttom
an Em

pire m
assively extended in the 15

thc
tow

ard the Balkan and South-Eastern Europe, in 16
thc

tow
ards East and N

orth Africa
•

During the 19
thcentury, the O

ttom
an Em

pire gradually
decreased its influence and becam

e the “sick m
an of

Europe” →
the countries both in Europe and M

iddle
East began to fight for independence > M

iddle East
becam

e the object of colonial influences from
W

estern
European pow

ers

deindustrialization in M
iddle East

•
D

uring the 18
th

c, the O
ttom

an Em
pire w

as com
pletely self sufficient in textile products &

exported carpet, silk and textiles.

•
Raw

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

pted the M
iddle

East to specialize in this area of production. →
W

hen the term
s of trade for these goods

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

hich
kept m

iddle eastern econom
ies in the cash-crop.

W
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:

1.
institutional developm

ents related w
ith industrialization interacted w

ith traditional
law

s of the region (interest-credit)

2.
hum

an capital and skills w
ere lacking for industrialization

3.
O

pening of the O
ttom

an econom
y to im

ports
4.

The system
of production and taxation did not encourage developm

ent.
5. D

uring the tw
entieth century, oil revenue becam

e im
portant > after that the

econom
ic history of the region becam

e a struggle for oil

M
inorities in Trade &

Finance

•
Som

e m
inorities w

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

O
ttom

an Em
pire> G

reeks, Jew
s, A

rm
enians, Christian A

rabs becam
e active in trade sector

and finance…
.. G

alata bankers dom
inated O

ttom
an financial developm

ent…
.. A

rm
enians

and G
reeks w

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

>m
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
im

itating their profession w
as not desirable.

Reindustrialization attem
pts

•
Skyes-Picot Agreem

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

w
hich w

as previously
part of O

ttom
an Em

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

•
Form

er O
ttom

an territory of Palestine becam
e a British m

andate in 1920 &
1922, the League of

N
ations decided that in this territory, a ‘national hom

e’ for Jew
s should be established…

..

•
strong im

m
igration of Jew

s…
. Their population share rose from

9%
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
Jew

ish im
m

igrants, the Jew
ish population group w

as initially m
ore urban and had a higher share in

industrial occupations than the Arab m
ajority.

Deficit in Education
1. Governm

ents spend little public funds on education. Extrem
e w

as Yem
en, w

here
children received alm

ost no schooling

•
Low

level of num
eracy and school education m

ade it very difficult to develop a class of
entrepreneurs→

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

2.
Another reason w

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

as discovered in the
M

iddle East…
.. changed the landscape of its econom

ies→
U

p to 1940, M
iddle Eastern

and north A
frican oil production w

as still below
5%

of w
orld production…

. Then
exploded to 26 %

in 1960, reaching a m
axim

um
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
m

erican firm
s.

Present Econom
y of the Region

•
econom

y
of the

M
iddle East

is very diverse, w
ith nationaleconom

ies
ranging from

hydrocarbon-
exporting rentiers to centralized econom

ies &
free-m

arket
econom

ies

•
A

griculture: although only about 15%
of the

land
is suitable for farm

ing, agriculture
rem

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 &

developm
ent

•
OPEC

(Organization of Petroleum
Exporting Countries)O

PEC
’s cartel policy during the A

rab-Israel
conflict of 1973 &

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

Saudi A
rabia, Q

atar, U
nited A

rab Em
irates, Egypt, Libya, A

lgeria, Bahrain and O
m

an.

Gulf Cooperation
Council

Bahrain, Kuw
ait, O

m
an,

Q
atar, Saudi Arabia &

U

nited Arab Em
irates.

Established in 1981

Free services

•
H

ealth Services

•
Education

•
Study abroad

•
Services Subsidized ( electricity, w

ater and fuel)

•
N

o tax

Oil prices falling

Iran
•

O
fficial Nam

e: Islam
ic Republic of Iran (1935)

•
Capital: Tehran

•
O

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
adm

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

M

ashhad.
•

M
uslim

(official) 99.4%
(Shia 90-95%

, Sunni 5-10%
), other (includes

Zoroastrian,Jew
ish

and
Christian) 0.3%

, unspecified 0.4%
(2011 est.)

•
Iran is a founding m

em
ber of the UN, ECO, O

IC (O
rganization of

Islam
ic Cooperation), and O

PEC

Tim
eline

1908

The British discovered large oil reserves in Iran and form
ed

the Anglo Persian oil com
pany

1924

Reza Shah Pahlavi seized control of the country and began to
m

odernize it

1941

Iran rem
ained neutral during W

W
II but Reza Shah leaned in

sym
pathy tow

ards Germ
any. By 1940, nearly half of all

Iranian im
ports cam

e from
Germ

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
oham

m
ad Reza Shah Pahlavi to succeed the throne.

1951

M
oham

m
ed M

osaddeq attem
pted to nationalize the British-

ow
ned oil industry. The shah opposed and rem

oved him

from
pow

er, but M
osaddeq regained pow

er and forced the
shah to flee Iran.

Tim
eline

1953

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

overthrow
M

oham
m

ad M
osaddeq

1963

1963-The shah im
plem

ented “The W
hite Revolution”

an aggressive cam
paign of social and econom

ic
w

esternization that w
as m

et w
ith a lot of opposition

1978

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

artial law
.

1979

Shah fled Iran w
hile Ayatollah Khom

eini returned from

France, w
here he w

as exiled
N

ovem
ber 4

th Islam
ic students storm

ed the U.S.
Em

bassy in Tehran, taking 52 Am
ericans hostage and

dem
anded that the shah return from

receiving m
edical

treatm
ent in the U

S to face trial in Iran

Tim
eline

1980

A United States backed Iraq
invaded Iran starting a w

ar that
lasts 8 years over territory.

1989

Ayatollah Khom
eini died and Ali

Kham
enei becom

es successor as
the new

national religious
leader.

1995

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

, com
m

itting hum
an

rights abuses, etc.

2007

The United States announces
new

econom
ic sanctions against

Iran targeted to im
pact the

country’s m
ilitary and nuclear

program
.

2009

Iran adm
its that it’s building a

uranium
enrichm

ent plant but
insists it is for peaceful purposes
only

2010

UN Security Council im
poses

fourth round of sanctions
against Iran over its nuclear
program

.

Tim
eline

2015

W
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.

2018

President Trum
p announces the US w

ithdraw
al from

the
2015 international deal on Iran’s nuclear program

. Iran w
arns

that it w
ill begin increasing its uranium

enrichm
ent capacity

if the deal collapses as a result of the US m
ove.

2021

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

governm
ent.”

20…
.

Israel

Israel
•

Size-20,770-22,072
sq

m
i

•
Population-about

9.4
m

illion

•
land

offers
little

in
the

w
ay

ofnatural
resources

on
w

hich
to

develop
either

agriculture
/

industry

•
Silicon

w
adi-

the
area

ofIsraelw
ith

the
high

concentration
ofhigh

technology
com

panies

•
The

m
ilitary

technology
industry

has
been

one
ofthe

country’s
leading

export
sectors→

com
m

ercialinnovations
beginning

in
the

1970s
w

ere
based

on
m

ilitary
related

R&
D

.

•
Im

m
igration

Betw
een

1990
and

2000,eight
hundred

thousand
citizens

ofthe
form

er
Sov

iet
U

nion
im

m
igrated

to
Israel,m

any
ofthem

w
ere

highly
educated

•
highest

num
ber

ofengineers
per

capita
in

the
w

orld—
140

per
10,000

em
ployee

Tim
eline of Israel’s History from

1948-Present

•
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

rm
istice

agreem
ents leave Israel w

it m
ore land. Jordan annexes W

est Bank and eastern
Jerusalem

. Egypt occupies G
aza.

•
1949-1960s:A

pproxim
ately one m

illion Jew
ish refugees and 250,000 H

olocaust
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
Sinai.

Israeli shipping allow
ed due to U

N
buffer force set up in Sinai and G

aza.

Tim
eline (cont.)

•
1967: Six-day w

ar–
Israel launches pre-em

ptive attack on Egypt w
ith Jordan and Syria joining the

w
ar w

hich lasts six days.

•
1977: Cam

p David Accord–
Anw

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

have Israel w
ithdraw

from
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-
w

ar m
ovem

ent.

•
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.

Tim
eline (cont.)

•
2002: Operation Defensive Shield on W

est Bank is
launched by Israeli arm

y. Barrier in and around W
est

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

•
2006:Second Lebanon w

ar

•
2007: Annapolis conference establishes “tw

o-state
solution”

•
2009: Right-w

ing parties w
in elections. Benjam

in
Netanyahu form

s governm
ent.

•
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

orth
$38bn over the next 10 years

•
2017:

Trum
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
recognized.

•
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

w
ith Israel.

•
4.9%

ofIsrael’s
totalG

D
P

is
spent

on
R&

D
(U

S 2.84%
)

•
H

igh tech is m
ajor driver

of econom
y

Turkey (Turkiye)

•
In Turkey during the tim

e of M
ustafa

Kem
al A

tatürk in the first half of 20
th

c,
m

any reform
s w

ere initiated in different
fields such as politics, econom

ics and
culture…

.abolishing the sultanate &
e

caliphate system
converting the republic

of Turkey into a secular state.

Turkiye
(cont.)

•
Turkey has played a key role in Europe’s m

igrant crisis, having taken in m
ore than tw

o m
illion

Syrian refugees, com
pared w

ith its ow
n population of around 80 m

illion.

•
A N

ATO
m

em
ber since 1952, one of the biggest m

em
bers of the N

ATO
alliance

•
Istanbul is the largest city and industrial and com

m
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

ovem
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

References
•

https://asiasociety.org/education/iran-20th-century

•
https://w

w
w
.nytim

es.com
/2021/04/02/w

orld/europe/us-iran-nuclear-deal.htm
l

•
https://w

w
w
.bbc.com

/new
s/w

orld-m
iddle-east-14542438

•
https://w

w
w
.thoughtco.com

/is-it-iranian-or-persian-3555178

•

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

•
https://w

w
w
.ganintegrity.com

/portal/country-profiles/iran/

•
https://gulfif.org/unem

ploym
ent-crisis-in-iraq-and-iran-a-chronic-dilem

m
a-for-state-and-society/

•
https://w

w
w
.statista.com

/statistics/1033856/iran-gdp-grow
th/

•
https://w

w
w
.bbc.com

/new
s/w
orld-m

iddle-east-29123668

•
https://w

w
w
.brookings.edu/blog/m

arkaz/2016/08/01/five-years-after-the-social-protests-in-israel-w
hat-has-changed/

•
https://w

w
w
.nordeatrade.com

/en/explore-new
-m
arket/israel/econom

ical-context

•
https://w

w
w
.brookings.edu/blog/m

arkaz/2016/09/30/how
-shim

on-peres-saved-the-israeli-econom
y/

•
https://country.eiu.com

/israel

•
https://w

w
w
.oecd-ilibrary.org/sites/af8f331e-en/index.htm

l?item
Id=/content/com

ponent/af8f331e-en#section-d1e2138

•
https://w

w
w
.britannica.com

/place/Israel/Industry

•
https://eh.net/encyclopedia/a-brief-econom

ic-history-of-m
odern-israel/

•
https://w

w
w
.jew
ishvirtuallibrary.org/israel-studies-an-anthology-israel-s-econom

y

Central ASIA

A H I S T O R Y O F T H E G L O B A L E C O N O M Y

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.

A HISTORY OF THE GLOBAL ECONOMY

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.

www.cambridge.org

Information on this title: www.cambridge.org/9781107507180

© 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.

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

Introduction: a history of the global economy – the ‘why’ and the ‘how’
J O E R G B A T E N

1 North-western Europe
J A N L U I T E N VA N Z A N D E N

I1 The great divergence in the world economy: long-run trends of real income
S T E P H E N B R O A D B E R R Y

H1.1 International financial regulation and supervision
C A T H E R I N E S C H E N K

2 Southern, eastern and central Europe
J O E R G B A T E N

I2 The Sputnik shock, the Pisa shock: human capital as a global growth determinant
J O E R G B A T E N

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
I R I N A P O T K I N A

3 The United States and Canada
P R I C E F I S H B A C K

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
F R A N C O A M A T O R I

H3.2 Business history and innovation
K N U T S O G N E R

H3.3 Alfred D. Chandler, Jr.: the man behind modern business history
F R A N C O A M A T O R I

4 Latin America

L U I S B É R T O L A A N D J O S É A N T O N I O O C A M P O

I4 Was there a ‘curse of natural resources’?
J O E R G B A T E N

H4.1 Latin America 1500–1800: early contact, epidemics and numeracy development
J O E R G B A T E N

H4.2 The economic consequences of independence in Latin America
S A L O M Ó N K A L M A N O V I T Z

5 Japan
O S A M U S A I T O

H5.1 Japanese industry during the Second World War
T E T S U J I O K A Z A K I

6 China
D E B I N M A

H6.1 International expositions and East Asia’s participation in the modern era
M A M I N

I5/6 Trade and poverty 1820–1913: when the third world fell behind
J E F F R E Y W I L L I A M S O N

7 Middle East, north Africa and central Asia
R I M A G H A N E M A N D J O E R G B A T E N

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
R I M A G H A N E M A N D J O E R G B A T E N

8 South Asia
T I R T H A N K A R R O Y

I8 Human stature as a health indicator in colonial empires
J O E R G B A T E N A N D K R I S I N W O O D

H8.1 Did brain-drain from India cause underdevelopment? Numeracy of Indian migrants and the Indian
population, seventeenth to twentieth century
J O E R G B A T E N

9 Southeast Asia and Australia/New Zealand
M A R T I N S H A N A H A N

H9.1 Pre-history, ancient and classical periods of Southeast Asia
M A R T I N S H A N A H A N

I9 Institutional development in world economic history
J O E R G B A T E N

10 Sub-Saharan Africa
G A R E T H A U S T I N

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

Conclusion
J O E R G B A T E N

Index

Figures

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)

Maps

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
mining)

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

Tables

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
countries

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.
1900

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

10.3 Output and manufacturing in selected African countries in 1960

Contributors

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
Cambridge.

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
Science.

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.

Introduction
佒

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
capacity

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
inhabitants.

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
life.

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.
2009).6

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
behind.7

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 www.clio-infra.eu 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)

(2)

Notes

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.

References

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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.
3).

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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.

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Boom.

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(ed.), Physiological and Morphological Adaptation and Evolution, The Hague: Mouton (pp. 301–14).

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Kingdom, 1750–1980, Cambridge University Press.

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Development in Asia, 1900–1960’, Working Papers in Economics and Finance No. 29, University of Tuebingen.

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Guntupalli, A. M. and Baten, J. (2006), ‘The Development and Inequality of Heights in North, West and East India,
1915–44’, Explorations in Economic History 43 (4), 578–608.

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for Preschool Children: How Relevant are Ethnic Differences?’, The Lancet 6, 611–15.

Harris, B. (1994), ‘Health, Height, and History: an Overview of Recent Developments in Anthropometric History’,
Social History of Medicine 7, 297–320.

Komlos, J. (1985), ‘Stature and Nutrition in the Habsburg Monarchy: the Standard of Living and Economic
Development in the Eighteenth Century’, American Historical Review, 90 (5), 1149–61.

Komlos, J. and Baten, J. (2004), ‘Looking Backward and Looking Forward: Anthropometric Research and the
Development of Social Science History’, Social Science History 28 (2), 191–210.

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Transitions, 1800–2010 Dataset Users’ Manual. www.systemicpeace.org/inscr/p4manualv2010.pdf, last
downloaded 1 September 2014.

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and Francis.

Moradi, A. (2009), ‘Nutritional Status and Economic Development in Sub-Saharan Africa, 1950–1980’, Economics
and Human Biology 8 (1), 16–29.

Moradi, A. and Baten, J. (2005), ‘Inequality in Sub-Saharan Africa 1950–80: New Estimates and New Results’,
World Development Volume 33–8, 1233–1265.

Steckel, R. (2009), ‘Heights and Human Welfare: Recent Developments and New Directions’, Explorations in
Economic History 46, 1–23.

van Zanden, J. L., Baten, J., d’Hercole, M. M., Rijpma, A., Smith, C., Timmer, M. (eds.), (2014) How Was Life?
Global Well-being since 1820, OECD, Paris.

1

North-western Europe
佒

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
century

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)

Source: www.clio-infra.eu.

Figure 1.2 School enrolment in north-western Europe

Source: www.clio-infra.eu.

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)

Source: www.clio-infra.eu.

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.

Conclusion
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.

Note

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
region.

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.

References

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,
411–47.

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, www.systemicpeace.org/inscr/p4manualv2010.pdf, 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.

I1

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

佒

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
short-lived.

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.

References

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
Economics.

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.

H1.1

International financial regulation and supervision
佒

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.

References

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.

2

Southern, eastern and central Europe
佒

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

Source: www.clio-infra.eu.

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

Source: www.clio-infra.eu.

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
War.

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

Conclusion
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.

Notes

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
countries.

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
Romania.

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
terms.

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.

References

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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
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Bibikov, M. (2013), ‘Russia: Early and Medieval Period’, in J. Mokyr (ed.), The Oxford Encyclopedia of Economic
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Broadberry, S. N. and Burhop, C. (2007), ‘Comparative Productivity in British and German Manufacturing Before
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Broadberry, S., Campbell, B., Klein, A., Overton, M. and van Leeuwen, B. (2014), British Economic Growth, 1270–
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Buyst, E. and Franaszek, P. (2010), ‘Sectoral Developments, 1914–1945’, in S. N. Broadberry and K. H. O’Rourke
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I2

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

佒

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
impossible).

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
development.

Notes

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.

References

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
Press.

H2.1

State finances during civil wars
佒

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
depreciation.

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).

H2.2

Property rights in the Russian Empire
佒

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.

3

The United States and Canada
佒

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); www.clio-infra.eu.

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
1966).

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
freedoms

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
century.

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

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
2013).

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
dollars)

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
1980s.

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.

Summary
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.

Notes

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
education.

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
development.

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.

References

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.

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.

Bordo, M., Redish, A. and Rockoff, H. (1995), ‘A Comparison of the United States and Canadian Banking Systems
in the Twentieth Century: Stability Versus Efficiency’, in M. Bordo and R. Sylla (eds.), The Evolution of Anglo-
American Financial Markets, Chicago, IL: Irwin Publishing Company.

Carter, S., Gartner, S. S., Haines, M. R., Olmstead, A. L., Sutch, R. and Wright, G. (2006), Millennial Edition of the
Historical Statistics of the United States, Cambridge University Press.

Cohn, R. (2002), ‘Immigration to the United States’, EH.NET Encyclopedia,
http://eh.net/encyclopedia/article/cohn.immigration.us, downloaded 7 November 2011.

Craig, L., Haines, M. and Weiss, T. (2003), ‘The Short and the Dead: Nutrition, Mortality, and the “Antebellum
Puzzle” in the United States’, Journal of Economic History 63 (June), 382–413.

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.

Dobado-Gonzales, R., Garcia-Hiernaux, A. and Guerrero, D. (2012), ‘The Integration of Grain Markets in the
Eighteenth Century: Early Rise of Globalization in the West’, Journal of Economic History 72 (3), 671–707.

Edelstein, M. (2000), ‘War and the American Economy in the Twentieth Century’, in S. L. Engerman and R. E.
Gallman (eds.), The Cambridge Economic History of the United States, Volume III, The Twentieth Century,
Cambridge University Press, 329–406.

Eltis, D. (2000), The Rise of African Slavery in the Americas, Cambridge University Press.

Field, A. J. (2011), A Great Leap Forward: 1930s Depression and US Economic Growth, Yale University Press.

Fishback, P. (2010), ‘Monetary and Fiscal Policy During the Great Depression’, Oxford Review of Economic Policy
26 (Autumn), 385–413.

Fox, J. (2011), ‘Public Health Movements, Local Poor Relief and Child Mortality in American Cities: 1923–1932’,
unpublished working paper, Rostock, Germany: Max Planck Institute for Demography.

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

Go, S. and Lindert, P. (2010), ‘The Uneven Rise of Public Schools to 1850’, Journal of Economic History 70
(March), 1–26.

Goldin, C. and Lewis, F. D. (1975), ‘The Economic Cost of the American Civil War: Estimates and Implications’,
Journal of Economic History 35 (June), 299–322.

Haines, M. (2000), ‘The Population of the United States, 1790–1920’, The Cambridge Economic History of the
United States, Volume II, The Long Nineteenth Century, in S. L. Engerman and R. E. Gallman (eds.), Cambridge
University Press, 143–206.

Higgs, R. (1971), The Transformation of the American Economy, 1865–1914: an Essay in Interpretation, New
York: Wiley.

Higgs, R. (1977), Competition and Coercion: Blacks in the American Economy, 1865–1914, Cambridge University
Press.

Higgs, R. (1987), Crisis and Leviathan: Critical Episodes in the Growth of American Government, Oxford
University Press.

Higgs, R. (1992), ‘Wartime Prosperity? A Reassessment of the US Economy in the 1940s’, Journal of Economic
History 52 (March), 41–60.

Higgs, R. (1999), ‘From Central Planning to Market, the American Transition, 1945–1947’, Journal of Economic
History 59 (September), 600–23.

Komlos, J. (1998), ‘Shrinking in a Growing Economy? The Mystery of Physical Stature During the Industrial
Revolution’, Journal of Economic History 58 (September), 779–802.

Maddison, A. (2001), The World Economy: a Millennial Perspective, Paris: Development Centre of the
Organization for Economic Cooperation and Development (OECD).

Margo, R. (1990), Race and Schooling in the South, 1880–1950: an Economic History, University of Chicago Press.

Marshall, M., Jaggers, K. and Gurr, T. R. (2011), Polity IV Project: Political Regime Characteristics and
Transitions, www.systemicpeace.org/polityproject.html.

McCusker, J. and Menard, R. (1991), The Economy of British America, 1607–1789, 2nd edn., Chapel Hill, NC:
University of North Carolina Press.

Meltzer, A. (2001), A History of the Federal Reserve, Volume 1: 1913–1951, University of Chicago Press.

Moehling, C. and Thomasson, M. (2012), ‘Saving Babies: the Contribution of Sheppard-Towner to the Decline in
Infant Mortality in the 1920s’, National Bureau of Economic Research Working Paper No. 17996, April.

North, D. (1966), The Economic Growth of the United States, 1790–1860, New York: Norton and Company.

North, D., Wallis, J. J. and Weingast, B. (2009), Violence and Social Orders: a Conceptual Framework for
Interpreting Human History, Cambridge University Press.

Rosenbloom, J. (2002), Looking for Work, Searching for Workers: American Labor Markets During
Industrialization, Cambridge University Press.

Social Science Federation of Canada and Statistics Canada (1983), Historical Statistics of Canada. Updated to more
recent years with additional tables at www.statcan.gc.ca/pub/11-516-x/index-eng.htm.

Steckel, R. and Prince, J. (2001), ‘Tallest in the World: Plains Indian in the Nineteenth Century’, American
Economic Review 91 (March), 287–94.

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

Walton, G. M. and Shepherd, J. F. (1979), The Economic Rise of Early America, Cambridge University Press.

Wicker, E. (2000), Banking Panics in the Gilded Age, Cambridge University Press.

Wright, G. (2013), Sharing the Prize: the Economics of the Civil Rights Revolution in the American South,
Cambridge, MA: The Belknap Press of Harvard University Press.

Zehetmayer, M. (2011), ‘The Continuation of the Antebellum Puzzle: Stature in the US, 1847–1894’, European
Review of Economic History 15, 313–27.

I3

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

佒

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–
30.

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
2010).

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.

References

Eggertsson, G. B. (2008), ‘Great Expectations and the End of the Depression’, American Economic Review 98,
1476–1516.

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 VoxEU.org.

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.

H3.1

Multi-divisional firms and managerial capitalism
佒

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.

Bibliography

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.

H3.2

Business history and innovation
佒

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.

Note

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

References

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

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.

H3.3

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

佒

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
Cole.

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.

4

Latin America
佒

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
America)

544 575 599 820 865 1003 962 1804 2038 2453 4670

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

Ratios

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

Japan.

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

A B C

Indo-American Afro-American Euro-American

(1) Subsistence agriculture and mining

(1.1) With strong mining export sector

Chile

Peru

Mexico

Bolivia

Colombia

Venezuela

(1.2) Without strong mining export sector

Ecuador

Paraguay

Guatemala

El Salvador

Honduras

Nicaragua

(2) Tropical agriculture

Brazil

Colombia

Cuba

Dominican Republic

Venezuela

Panama

Costa Rica

(3) Temperate-zone agriculture Argentina

Uruguay

Chile

Summary:

(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

Ratios

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

Small
countries/West

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

Notes:
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–
1929)

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
population.

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
volatility

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
institutions.

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
prices

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
globalization.

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
labourers.

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
growth.17

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
education.

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
education.

Inequality
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.

Conclusion
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.

Notes

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
production.

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
literature.

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.

References

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:
Crítica.

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
Mexicana.

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
Lectures).

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
House.

I4

Was there a ‘curse of natural resources’?
佒

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.

Note

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.

References

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.

H4.1

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

佒

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
2012).

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
development.

References

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.

H4.2

The economic consequences of independence in
Latin America

佒

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.

5

Japan
佒

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

Sources:

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
dollars)

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:
323–37).

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
countries.

Note:

* 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
industrialization.

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).

Conclusion
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.

Notes

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
uncertain.

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
point.

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
period.

Nakamura, T. (1994), Lectures on Modern Japanese Economic History: 1926–1994, Tokyo: LTCB International
Library Foundation. A chronological overview, placing economic history topics in political, military and
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.

References

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,
www.cepr.org/active/publications/discussion_papers/dp.php?dpno=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.

Johnson, C. (1982), MITI and the Japanese Miracle: the Growth of Industrial Policy, 1925–1975, Stanford
University Press.

Komiya, R., Okuno, M. and Suzumura, K. (eds.) (1988), Industrial Policy of Japan, New York: Academic Press.

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).

McNeill, William H. (1979), Plagues and Peoples, Harmondsworth: Penguin Books.

Miyamoto, M. (2004), ‘Quantitative Aspects of Tokugawa Economy’, in A. Hayami, O. Saito and R. P. Toby (eds.),
Emergence of Economic Society in Japan 1600–1859, Oxford University Press, 68–82.

Nishikawa, S. (1987), ‘The Economy of Chōshū on the Eve of Industrialization’, Economic Studies Quarterly 38,
323–37.

Passin, H. (1965), Society and Education in Japan, New York: Teachers College Press.

Saito, O. (1983), ‘Population and the Peasant Family Economy in Proto-industrial Japan’, Journal of Family History
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.

Saito, O. (2010), ‘An Industrious Revolution in an East Asian Market Economy? Tokugawa Japan and Implications
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, http://hdl.handle.net/10086/13705.

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’,
Venice.

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.
DP15-3, http://hdl.handle.net/10086/27295.

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.
DP15-4, http://hdl.handle.net/10086/27294.

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.

Smith, T. C. (1958), ‘The Land Tax in the Tokugawa Period’, Journal of Asian Studies 18 (1), 3–19.

Smith, T. C. (1959), The Agrarian Origins of Modern Japan, Stanford University Press.

Smith, T. C. (1969), ‘Farm Family By-employments in Preindustrial Japan’, Journal of Economic History 29 (4),
687–715.

Smith, T. C. (1973), ‘Pre-modern Economic Growth: Japan and the West’, Past and Present 60 (1), 127–60.

Totman, C. (1993), Early Modern Japan, University of California Press.

van Zanden, J. L. (2009), The Long Road to the Industrial Revolution: the European Economy in a Global
Perspective, 1000–1800, Leiden: Brill.

H5.1

Japanese industry during the Second World War
佒

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
2014).

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).

References

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.

6

China
佒

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.

Introduction
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
regime.

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
Basin.

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
conversion

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
funds.

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.

Conclusion
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.

Notes

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.

References

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
Press.

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).

H6.1

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

佒

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
economy.

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.

I5/6

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

佒

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
War.

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.

Note

1. This brief summary is taken from my book Trade and Poverty (2011), Chinese trans. in paperback (2013 China
Renmin University Press: Beijing).

Bibliography

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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),
255–72.

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.

7

Middle East, north Africa and central Asia
佒

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
Russia.10

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
century?

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
7.6).

Figure 7.5 Height in Middle Eastern countries (male)

Source: modified from Stegl and Baten (2009). Turkmenistan added from www.clio-infra.eu.

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
economies.

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
economies.

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 (www.barrolee.com) 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
1950s.

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

Source: www.clio-infra.eu.

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.

Conclusion
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
Kyrgyzstan.

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.

Notes

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
production.

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
accessibly.

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.

References

Barro, R. J. and Lee, J. W. (2013), Data set: www.barrolee.edu, 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
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Danubio, M. E., Domenico Martorella, F., Rufo, E. V. and Sanna, E. (2011), ‘Morphometric Distances Among Five
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1–12.

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
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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
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Juif, D. and Baten, J. (2013), ‘A Story of Large Land-owners and Math Skills: Inequality and Human Capital
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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.

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I7

Women in global economic history
佒

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.

Source: www.clio-infra.eu.

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).