Protected: EH483 Notes for Students (Rather a lot of LSE information here so I’m password protecting this one)

This content is password protected. To view it please enter your password below:

Advertisements

Falling behind and catching up

There are two contrary things which have happened since the instigation of industrialisation two centuries ago. The first is a divergence in income and the second is a convergence in nearly all other measures of human wellbeing.

One of the questions we have to address is “will globalisation lead to convergence or divergence for the world’s citizens?”

The case for convergence.

As markets integrate, some maintain, material inequality will diminish.

  • There is a modernisation argument. Once poor countries get started on industrial development and the insitutions of a modern state they will continue to develop. This view was popular in the 1950s, but has fallen out of favour today.
  • Late-development. As popularised by Rostow and Gerschenkron, they argue that there are certain advantages of backwardness which can be exploited. This allows for faster growth for poorer countries, leading to them converging on the technological limit of wealth which the richest countries have hit.
  • Neoclassical growth theory argues that market integration will lead to price equalisations of land, labour and capital and thus increased demand for the poor world’s labour and resources which will cause convergence in income and prices.
  • New Growth Theory argues that a similar process as described above occurs for the diffusion of knowledge – a non-rivalous, non-excludable public good – which allows countries to catch up.

This leads to closing inequalities.

The case for divergence.

  • Marxist argue that capitalist production involves the extraction of surplus value from labour. Thus it creates and reproduces inequality because a capitalist income is in effect an economic rent, extracted from labour for by owning capital. Market integration leads to this process merely becoming international.
  • Dependency – Labour is not fully marketable and there will always be some degree of coercion between core and peripheral economies which keep the rich rich and poor poor.
  • Geography – (from Krugman) – Different economic processes have different economies of scale, therefore different developmental paths will lead to a differing economic mix. Because some economies enjoy larger returns to scale, and there are not intrinsic reasons certain industries are in certain places, inequality will naturally occur in a global environment.
  • In contrast to the case for convergence, increasing amounts of knowledge are protected and do not diffuse easily. Those with this knowledge will be wealthier than those without it.
  • Complementary factors play a role. Certain industries, skills and workers cluster in certain places. This produces network effects and positive externalities to which the returns are higher.

This leads to increasing inequalities.

What question does this lead us to ask?

  • How has the world distribution of income changed since the beginning of modern economic growth? 
  • What are the reasons for increasing or decreasing inequality in incomes?
  • Did all benchmarks of growth follow similar pathway? Did quality of life follow the same path as income?Ineq

Measuring inequality.

There are two ways of measuring inequality. World inequality and international inequality.International inequality shows us the inequality between the per capita income of average members of different nations. It offers a good measure because we have the relevant data to make this measure useful for a large number of countries across a long timescale. World inequality treats each individual as a unit and takes into account intra and well as international inequality. It gives a better picture but we only have data from the middle of the 20th C.

There are different measures which we can use to describe world and international inequality.

We can sue the Gini Coeffiecent, the Theil Index or a simple ratio of the richest 10% to the poorest 10%. Each tells us something different and has different methodological flaws and benefits.

There are also different Indices which we can measure. Income is one measure of wellbeing, but there are more. For example, literacy, life expectancy at birth and child mortality.

We also have to think about the level of aggregation which we use. We can aggregate the income/life expectancy of the world, down to the aggregate income/health of London, each is useful in certain ways, but each also obscures certain things.

What data do we have on the past?

Next we turn to the data which we have on international and world inequality back into the 19th C and before. Much of this data come from Angus Maddison, good obit here. He trailblazed the study of income of those living in the distant past. Without his work we would have a lot less to work with in Global History and would have to rely a great deal more on conjecture.

There are limits to his data, administration and statistical records are sketchy for much of the past. For example, large land empires like the Muhgal and Ottoman decentralised much of their administration – local administrators had less need for complex statistics and could rely on local knowledge, hence a dearth of records. On top of this locational problem there are difficulties in certain economic sectors too. As most wealth came from land for much of the world’s history, income information from land is well recorded. Handicrafts and transport are both more mobile and harder to tax, so records are scarcer. Both of these lead to a bias in the data, where we have no information it is safest to assume nothing has happened, this biases our view of the poor past towards it being undynamic.

However, the data sets are still magnificent and all we have to work with. 

  1820 1910 1950 1992
Gini coefficient 0.50 0.61 0.64 0.66
Mean world income (PPP at 1992 prices, $) 659 1450 1806 2801
Extreme poverty (headcount %) 84 66 55     24
Number of extreme poor (million) 887 1128 1376 1294
% of world inequality explained by between-country inequality (based on Theil index) 12 37 60 60

A few things stand out. World inequality was high in 1800 but got higher through to the 1950s where it has held steady since. The proportion of the extremely poor as sunk massively. Much of this increase inequality came from international not world changes, in some countries everyone got rich, in some very few or none did.

There is a slow down in 1950. The lead in growth rates between Europe & its offshoots and the rest of the world shrinks, a relative slowdown occurs. Catchup growth begins in Japan, and then later Southeast Asia as a whole. Different clusters of countries drive these changes.

The dominance disequalising force in the 19th C was the relatively slow growth of Asia. Income per capita in India between 1820 and 1950 rose 10% in total, in China over the same period the total was 17%, the US economy expanded 800% over the same period.

This leads us to some otehr questions which we will address.

  • Origins of inequality. When did it begin?
  • Cultural exceptionalism: Did regions have distinct features? Politics (colonialism, despotism)? Institutions? Resources? Scale of trade?
  • European convergence
  • Catching-up does work, or does it?

The period 1950-1992 (from when Maddison’s data ends) shows the effects of catch up in Asia. Three groups of countries; poor countries with low and variable growth, middle income countries with high and variable growth, and the wealthy world with low but steady growth.

The story of the modern era has been one of income divergence, but a subplot (or the main story, depending on your position) has been the convergence of various quality of life indicators.

What is driving this?

  • High-return-to-small-change hypothesis – altering behaviour slightly can massively increase survival, better personal hygeine and widespread, but cheap, vaccinations can massively boost quality of life.
  • Public health hypothesis – public health policy has been directed far better than economic policy in these contries, fewer differing national interests and fewer differences of opinion on what to do.
  • Urbanization hypothesis – as the poor world urbanises, more people more closer to doctors and they benefit from economies of scale.
  • Triumph of globalization hypothesis – the globalisation of knowledge on health and nutrition allow people to live better lives.

Is this divergence between income and other quality of life indicators important or mere trivia? Three quotes 

The income measure has always overplayed the difference between India and the United States.

Kenny, World Development 

Technologies, which appeared to have done little in increasing Third World income, have improved other measures of the quality of life … globalization has been too quickly dismissed by some as a driver of development.

Kenny, World Development 

HDI convergence is more a logical than an empirical result, arising from the index’s definition, and so is of little interest in the debate about world inequality.

Bob Sutcliffe, World Inequality and Globalization Oxford Review of Economic Policy, 20(1), 2004, 15-37.

HDI converges on well known limits, whereas maximum potential income continues to increase at 2/3% a year. HDIs are bound to converge by definition. However, the improvements in wellbeing are not trivial.

What has driven the improvement in people’s quality of life?

  1. Globalisation > Income > Health?
  2. Globalisation > Knowledge > Health?

Each of the above two mechanisms, increased income leading households to better care for themselves, or increased knowledge of best practice leading states and households to alter behaviour at relatively little cost are both viable explanations. 

Above is the Preston curve of life expectancy at birth S.H. Preston, ‘The changing relation between mortality and level of economic development’, Population Studies, 29(2), 1975.

Preston aruges that int data shows that the association between income and health is strong in poorer countries because of public policy failures. People can only afford to increase public policy if income increases. Therefore any improvement income-dependent.

Conclusions:

  • International inequality in income increased 1820 – 1950, remained stable 1950-92.
  • 1820-1950: ‘dominant disequalizing force’ is the stagnation in India and China
  • 1950-1992: Selective catching up.
  • 1992 onward: a faster and broader catch-up?
  • Catching up faster in health and education.
  • Did globalization play a differential role in income (technology of production) and HDI (technology of health)?

EH483: The Development and Integration of the World Economy in the 19th and 20th Centuries: Introductory Lecture

Lecturers = Dudly Baines – Albrecht Ritschl – Tirthankar Ray – Kerry Hickson = Monday 1300-1400 in the New Academic Building. Seminars are on Tuesdays.

The coursework for this unit will include two formative essays of 1500 words (pah, my undergrad essays were 4000 words) and one assessed essay of 2500 words. These will be due towards the end of the course. There will also be a three hour exam in May 2011.

All the details and deadlines are in the Notes for Students on Moodle.

Enough admin, to the meat!

There is an element of comparative development of the world economy. The unit is economics focussed and 19th century focussed. The course will be very long run to begin with and we wil then drill down into more detail later.

Objectives of the course

Explain the origins and evolution of  international inequality in the “modern world.”

Comparative elements – Demography, geography, trade, urbanisation, culture, institutions, technology and policy.

Case Study elements – Industrialisation, catch-up, fall behind, factor price integration.

GDP per capita (1990 international $)

  1870 1913 1950 1973 1998
UK 3191 4921 6907 12022 18714
W.Europe 1974 3473 4594 11534 17921
US 2445 5301 9561 16689 27331
Latin America 698 1511 2554 4531 5795
Japan 737 1387 1926 11439 20413
Other Asia 543 640 635 1231 2936
Africa 444 585 852 1365 1368

Shares of World GDP (%)

  1870 1913 1950 1973 1998
UK 9.1 8.3 6.5 4.2 3.3
W.Europe 33.6 33.5 26.3 25.7 20.6
US 8.9 19.1 27.3 22.0 21.9
Latin America 2.5 4.5 7.9 8.7 8.7
Japan 2.3 2.6 3.0 7.7 7.7
Other Asia 36.0 21.9 15.5 16.4 29.5
Africa 3.6 2.7 3.6 3.3 3.1

Every region is richer now then it was in 1870 (the time when a truly modern economy began to appear), but some are regions are richer than others. Two things stand out.

Some areas expereinced rapid growth and some did not. We need to look to the genesis of this rapid growth. It was not an increase in the use of land or other inputs which started this growth, but an increase in productivity.

The world became more unequal and we see a great deal of divergence between economies that industrialised and those that did not.

Growth

Classical economics looked at incereasing inputs to creat more wealth. Growth rested on using inputs more efficiently.

Growth was assumed to run out at some opoint, however, this has evidently not happened.

Marx helped introduce the idea that industry could grow even when land and other inputs became scarce.

Innovation has been treated as exogenous in many growth models driving progress forward. This is of course not good enough. Endogenous growth theories are essential.

Inequality

Economics helps us describe interpersonal inequality, this can be scaled up with some modification to help us look at international inequality.

Key concepts

  • Factor Endowments
  • Factor Rewards

Classical economics looked at three factors, each controlled by a different class: Landlords controlling land, Workers controlling labour, and capitalists controlling finance and physical capital. The distribution of income is dictated by different factor endowments and factor rewards. Labour’s share is dictated by what is required to fulfil its own subsistence and reproduction; the Landlord’s share is dictated by the fertility and scarcity of land; and the capitalist’s share by the demand for loanable funds (However, Marx argued that a capialist’s income was a form of economic rent on the labour of the workers).

Neoclassical economics looks at the world differently. My lecturers argues that the shape of the world changed somewhere around 1850 and the borders between the different classes break down.  Individuals and households are now better described as possessing a portfolio of skills and capital. The market then sets their rewards on the basis of the demand for the productive factors they can supply.

Two issues complicate this

Factor Ownership – Risk and uncertainty – transaction costs – institutions. These shape both the supply and rewards of certain productive facotrs. For example;

  • Gender plays a role in reducing the rewards which women receive in return for their skills.
  • Slaves versus free labour
  • Spain – their two tier labour market

Technology – change alters the composition of skills and factors in demand. This leads to wage inequality. Some factors are complimentary; for example you couldn’t print the Gutenberg Bible without the creation of the wine press. Network externalities – in high density areas the same skills can receive larger rewards because there is a greater interaction with complimentary factors.

You can map this discussion of interpersonal inequality onto international inequality.

Nations have different endowments. Different rewards persist in the presence of trade cost, transaction cost, formal institutions, culture, political system, geography, demography  etc.

Market integration should lead to a convergence of costs, prices and incomes. This however is far from inevitable.

What made the The 19th Century special? The period encompassing the industrial revolution also saw a transport revolution which helped increase trade, Smithian specialisation and productivity advancements:

  • The cost of freight fall

  • Industrialisation
  • The introduction of more uniform legal codes
  • Communications costs plummeted
  • This was the 1st Globalisation
  • trade and mobility of factors
  • population growth
  • urbanization
  • technological and institutional change

Convergence seen in the North Atlantic (and Dominions), but the rest of the world sees Divergence, Big Time.

The course will address the question of why did some areas experience this revolution and why did some not?

  • Marx – markets did not determine rewards – political economy – colonialism
  • Rostow argued that there was one process – modernization – and that this proceeded at different speeds. Parts of the world were merely not yet ready.
  • Some argue that Geography played the most important role. Tropical countries didn’t develop, so it must be harder to develop in the tropics, natural
  • resources like coal helped the UK develop so countries without these natural endowments were not able to develop.
  • Some areas did not develop because of Markets and risks – risks of commodity market fluctuations – risks of financial integration.

Other reasons to be examined include:

  • Some countries had better institutions (property rights, commercial culture, civic mindedness), which allowed them to utilise their endowments.
  • Some areas developed effective contract law and contract design so that the risks of economic activity were reduced.
  • Culture may have played a role. For example there may have been a bias against innovation in some places.

A further part of the course will examine “catch-up” development. What policies, factors and contingent events aided countries in catching up with the developed world.

  • Gerschenkron examined late industrialisers like the US, Germany and Russia and saw how the later the industrialisation, the more the state had to intervene to shape markets.
  • Alice Amsden has argued that Southeast Asia Industrialised by ‘getting prices wrong’. They forced surpluses out of productive agriculture into unproductive activities to prompt industrialisation.
  • “Death of distance.” As space becomes smaller it is easier and easier to trade knowledge, goods and services. This process has accelerated over time, particularly since the 1970s.

The course will also examine on whether growth counts as development. Is a measure like the Human Development Index better? Does equality or equity have an important role to play?

All will be revealed over the next year.

Welcome to Global History @ LSE

This is the blog of a student taking the Global History MSc at the London School of Economics.

I am studying part time from October 2010 to September 2012 and I will be posting my lecture notes, seminar notes, reading notes and essays online.

This is for my benefits so I can revise wherever I am but is open to anyone curious about the course, whether they’re currently studying at LSE or thinking about signing up.

LecturesLecture in the New Theatre, c1981 by LSE Library.

SeminarsDr Peter Loizos (left) and students, c1981 by LSE Library.

ReadingStudent in the library, 1981 by LSE Library.

EssaysStudent in the library, 1981 by LSE Library.

You can see my lecture notes etc by clicking on the pictures above. Browsing by courses is also available if you use the links below.

All images are taken from the LSE archive on Flikr. This site has no official link to the London School of Economics and Political Science. This site cannot verify the content of external links. Some rights reserved under a Creative Commons Attribution-NonCommercial 3.0 Unported License.