Why are some countries developed and others not?

Dr. Pradipta Chaudhury

Abstract

This article surveys the literature on the question, “Why are some countries developed and others not?” It is well known that the fortunes of nations have changed over long periods. China and India were the most advanced countries in the pre-modern world and till the eighteenth century. Western Europe, led by the U.K., and her offshoots, led by the U.S.A., overtook the advanced countries of Asia in the nineteenth century. The main reasons behind this reversal of fortunes are found to be Western Europe’s superiority in violence (gun powder technology), deceit and in open ocean navigation which gave them access and liberty to use the enormous wealth and resources of their colonies. However, a complete list of factors contributing to growth and development includes geographical and historical conditions, political economy, military strength, and its copious use along with cruelty, cunning, and deception, wisdom and foresight of the elite, exploitation of international resources including knowledge and technology, manipulation of international trade, investments in human capital, skills, science, technology, infrastructure and creation of right institutions and incentives for productive activity and disciplined hard work by the labor force.

Introduction

Why are some countries developed and others not? Or, why are some countries rich while other countries are poor? This is one of the fundamental questions in social sciences. Any student of economics or other social sciences will be curious to know the answer. By now there is a rich pool of scholarly writings on this topic. Particularly in the last two decades a vast literature has emerged around this question. Also, this literature has become insightful, as more and more competent academics, led by economic historians, have increasingly contributed papers of high quality in top ranked academic journals. Many scholars have written well researched books published by reputed publishing houses. There is a certain excitement to be experienced through reading this literature and in thinking about the reasons underlying the disparities in the fates and performances of societies. This survey article is an attempt to bring this literature within the reader’s easy reach. It is hoped that the question and the various answers given so far (and summarized here) will generate a craving in the reader.

Let us begin with some very obvious and well known facts: Everybody knows that today the USA is the number one economic, military and political power in the world. It has been occupying this premier position for the past seven decades that is since the Second World War. Now China is occupying the second position. Japan, Germany, France and Britain follow in importance in economic and political power. However, it was not like this always. The sixteenth century is supposed to be the beginning of the modern world. At that time and till the end of the eighteenth century, the rankings of countries were different. Then, China was the number one country in the world. It was the global leader in total output, manufacturing output and exports. It was also the leader in science and technology. China was the number one producer and exporter of manufactures in the world. Its major exports were silk, tea, handicrafts and porcelain. India was the second most important producer and exporter of manufactures, the most important item being cotton textiles. In fact, cotton and sugar are India’s major contributions to everyday life. But, for some centuries the growth of science and technology in India had generally slowed down and actually stagnated in many fields. From the twelfth century, if not earlier, state patronage for science and technology had virtually disappeared in northern India, though some patronage was available in southern India till the sixteenth century. As a result, in the sixteenth century India was behind China in most matters.

For many centuries and till the end of the eighteenth century, countries in Western Europe, and the rest of the world, were primarily importers of manufactures from China and India. Western Europe also imported spices from India and the South East Asian islands in the Indian Ocean. In return, these countries exported large amounts of gold and silver to China and India. Both India and China were known as sinks of precious metals during the medieval period. These countries could absorb huge amounts of precious metals in exchange for their handicrafts of acknowledged high quality. In return, Western Europe sold very little to Asia though expert builders of canons and military personnel from Western Europe were in demand in both India and China. They were employed in the armies of the kings.

The Great Divergence or the Reversal of Fortunes

At the beginning of the nineteenth century, the situation was reversed: Britain in particular and Western Europe in general became the leaders in science, technology and manufacturing. From this time, the UK and the other countries of Western Europe began experiencing economic growth, although at rates of only about 3 % per annum, but sustained over a long period. It was the beginning of modern economic growth. Hence, it is claimed that a ‘Great Divergence’ happened in the paths of nations. It was also noticed that the countries which were the most advanced at the beginning of the sixteenth century became backward by the end of the twentieth century while those who were the most backward at the beginning of the sixteenth century became the most advanced by the end of the twentieth century. This was named ‘Reversal of Fortunes’. The great divergence or the reversal of fortunes of nations was based on or was largely due to the phenomenon of the first Industrial Revolution (henceforth called IR) in Britain. Hence, the question, “why are some countries developed and others not?” can also be rephrased as “why did the Industrial Revolution occur in Britain?”

Beginning in 1757, India was colonized by the British. Half a century later, India became a major importer of manufactures, primarily cotton textiles. The land of cotton was inundated with cotton goods manufactured in England, as Karl Marx put it. In the middle of the nineteenth century China was militarily humiliated by the Western European powers. The British forced China to import and consume opium, though opium was banned in China and thus the trade was illegal. This opium was largely produced in India under the coercive rule of the East India Company. In return, the British received Chinese silk, tea, handicrafts and porcelain virtually free as the opium was obtained virtually free from India. The century from the middle of the nineteenth, when China was subjugated by the west and was forced to concede treaty ports, to the middle of the twentieth century, when the People’s Liberation Army liberated China from western dominance, is considered the century of national shame in China. It is well known that during the sixty-five years since independence the Chinese have achieved the fastest rates of economic growth and development known in human history. This phenomenon is called ‘from Divergence to Convergence’. Likewise India, after centuries of colonization, is performing better. Thus, the fortunes of nations have fluctuated over time.

A major question is why the Western European countries went so far ahead as to overtake the Asian countries which were till then the economic, technological and cultural leaders of the world. Conversely, why did China and India fall behind Western Europe since the nineteenth century, if not earlier? A related question is how China has managed so decisively to turn its fortunes around since the mid-twentieth century.

Cultures and Treasures

A great variety of factors have been analyzed to explain the rise of the West and the falling behind of the East. One of the earliest explanations was in terms of values and cultures. These factors still remain popular. The superiority of the West in values was supposedly due to the emphasis on rationality, materialism, hard work and scientific temper. In contrast Asian values emphasized spiritualism and other worldliness (Landes, 1998). There can be no doubt that cultures matter and progressive values, discipline, hard work, scientific outlook, keenness to learn from others, all matter a lot in making a society great. However, there is no clinching evidence to show that Western Europe had an intrinsic superiority over Asia with respect to these values. On the contrary, the Eurasian landmass is continuous. And social, commercial and technical ideas originating in one region gradually spread over the other regions. It is also known that in many cultural and technological respects China and India were not behind Western Europe. Furthermore, the fact that Asia was ahead of Western Europe in manufacturing goods for mass consumption and in some other technology, such as medicine, metallurgy and alchemy, should point to some cultural-technological superiority of Asia. Mathematics, astronomy, health, medicine and surgery, music, state-craft, literature, philosophy, architecture, metallurgy and manufactures are some of the major fields in which India made great contributions beginning very early. China made even greater contributions to science, technology, manufactures, warfare, state-craft, political economy, culture and everyday life (Needham, 1954-). It is well known that till the end of the eighteenth century, most of the useful things in civilized life came from China (paper, printing, compass, silk, tea, porcelain, gun powder, fire arms etc.) and India (cotton textiles, spices, and sugar). Then, how are the cultures of the West held intrinsically superior?

Beginning from a condition when Western Europe was a net importer from Asia, it later became the predominant source of manufactures and technology. It implies that the earlier (backward) culture and values of Western Europe were not a hindrance for its scientific and technological progress from the eighteenth-nineteenth centuries. Conversely, the earlier (forward) culture and values of Asia did not prevent its colonization and technological and manufacturing slide back in the eighteenth-nineteenth centuries. Hence, the principal causes of the reversal of fortunes have to be found elsewhere.

Some scholars argue that the loot of gold and silver from Latin America by Western Europe through violence and deceit led to the creation of the modern world. This resulted in a huge expansion in world trade in the very profitable Asian goods carried out by the Western Europeans and finally led to the dominance of the West. Before the loot of the accumulated wealth of the Aztecs and the Incas and the extraction of gold and silver from the mines of Latin America, the Europeans could buy Asian spices and handicrafts with their own gold and silver. With huge amounts of gold and silver looted from the Spanish and Portuguese colonies in Latin America, the capital available to the Europeans for international trade increased immensely. As a result the total value of Asian goods traded by them expanded fantastically. In turn, their profits rose phenomenally (Frank, 1998). Using these profits and the knowledge of manufacture of Asian goods, the merchants became capitalist manufacturers of goods of mass consumption which out-competed the Asian goods. But, there is a practical problem with this simple line of argument. While Spain and Portugal benefitted the most from the loot of Latin American wealth, the country where the first industrial revolution took place and the country which dominated the world from 1816 to 1914 was Britain. Britain did not have a Latin American colony and it only got a minor share in the loot of Latin American wealth through piracy of Spanish and Portuguese ships carrying the precious metals. Furthermore, India and China who already had huge hoards of precious metals received a large part of the American gold and silver through trade surplus with the West. But these countries did not industrialize then. Hence, some things other than wealth appear to be necessary for an industrial revolution.

The Role of Institutions

Nobel laureate Douglas North, along with his coauthors (North et al, 1973, 1989), argued that the superior institutions of Britain which promoted private enterprise, enabled it to become the first modern industrial power house of the world. An institution is a rule or a set of rules, which governs human interactions, plus its enforcement mechanism. In this way, family, state, property rights, law, judiciary and police are all institutions. There can be no doubt that good institutions and incentives facilitating and promoting investment in human capital, productive economic activity, scientific research and technological innovations are necessary for economic development. North and his coauthors have singled out the ‘Glorious Revolution’ of 1688 in Britain as the most important event which ushered in the crucial institutions. The event meant the removal of the incumbent king and the installation of a new king who had to respect the supremacy of the Parliament. The parliament was now dominated by the rich and powerful including the successful merchants. The Glorious Revolution, according to North et al, strengthened and ensured the safety of the institution of private property, common law, established credible commitment of the state to lenders of capital/finance, reduced the rate of interest on loans and thus promoted economic activity, private enterprise, productive investment and capital intensive technological innovations.

While it is true that before the dominance of the British Parliament beginning in 1688, the sovereign could borrow from private sources and then renege on the obligation to pay back, it is not true that private property became secure only after 1688. In fact, private property was quite safe and prices of land were stable for nearly one hundred years before 1688. And, the rate of interest was actually secularly declining for more than one century before 1688. This trend was common to the whole of Europe, though the decline was faster in all republics. The decline in the rates of interest in Western Europe can also be attributed to the loot of huge quantities of precious metals from Latin America after its discovery in 1492 by Columbus, and to the consequent boundless expansion in highly profitable international trade and the resultant accumulation of immense amounts of capital in Western Europe. Furthermore, the industrial revolution (IR) did not occur immediately after 1688. The beginning of the IR is usually dated at 1780. Thus the institutions emphasized by North and his coauthors were not sufficient for the economic transformation of Britain (Clark, 1996, Sussman and Yafey, 2006). It is also important to note that the Glorious Revolution achieved a kind of political and business merger between Britain and the Dutch Republic. In 1688 a section of the British elite had invited the Dutch emperor, William of Orange-Nassau to invade England. William deposed the English king and went on to rule over England, Scotland and Ireland. The Dutch economy was the most advanced in the world then with a sophisticated financial sector. It helped the British to learn from the Dutch, a lot of very useful economic activity, including the crucial modern financial markets, the Dutch style stock market, and the market for national debt. This helped government borrowing for financing of wars, the British economy and empire in a major way.

Recently, Acemoglu and his coauthors (2002) have reemphasized the importance of institutions in causing the Reversal of Fortunes of nations, using cross-country econometric analysis. They have argued that the fortunes of nations reversed between 1500 and 1995 due to the agency of the Europeans. They found that those countries which were rich in 1500, before European colonization, were poor by 1995 while those which were poor in 1500 were rich by 1995. They used population density as a proxy for incomes in 1500 as evidence on incomes was not available then. They found that the economic performance of the countries in 1995 correlated very well with the mortality rate of Europeans in these countries, which were colonized by the Europeans. They used European settler mortality rate as an instrument/proxy for the institutions introduced by the Europeans. They argued that in countries where the European settler mortality rates were high (e.g., India and African countries), the Europeans decided against settling down permanently and hence they introduced or strengthened extractive, rent-seeking institutions which merely expropriated the surplus. In these colonies they did not encourage productive investment and did not bring in economic growth. On the other hand, in those colonies where the Europeans faced low rates of mortality they decided to settle down (e.g., the USA, Canada, Australia and New Zealand). There, they introduced secure private property rights and encouraged productive investment and hence promoted economic development.

While nobody can dispute that appropriate and good institutions are necessary for economic development and growth, the identification of good institutions with private property is not obvious. Both the Soviet Union and China made spectacular progress in the twentieth century without security of private property. China continues to flummox the believers of ‘secure private property, political democracy and low corruption cause growth’ school of thought. The institutions behind China’s spectacular progress continue to be debated. Some have argued that the ‘Regionally Decentralized Authoritarian’ regime of China has some unique incentive mechanisms operating at the decentralized-regional levels. The economic decentralization and regional competition promote growth in China even under a centralized political dictatorship. In fact, China is the most decentralized country, much more decentralized than the USA. Some of these institutions and incentive mechanisms are seen to be continuations of some incentive structures which were characteristics of the imperial Chinese bureaucracy (Xu, 2011).

Acemoglu and his coauthors’ works have been criticized on many other grounds (Austin, 2008). Some of the ‘data’ used by them do not fit the definition of data. Too much or rather the whole credit for economic growth as well as the reversal of fortunes is attributed to the European colonizers and virtually no role of the indigenous forces is acknowledged. Some scholars point out that there are certain methodological problems in the regressions of Acemoglu et al. Perhaps, the strongest criticism has come from Glaeser and his coauthors (2005). They point out that the European settler mortality rate correlates very well with the human capital content of the population of each country, as measured by the average number of years of schooling. Thus the mortality rate is not an instrument for institutions but an instrument for human capital. They argue that the differences in growth performances of these countries are better explained by human capital. They also show, with their econometric analysis across countries that human capital leads to improvements in institutions in addition to causing growth. Also, it is found that democracy is neither necessary nor sufficient for growth of human capital. For example, some dictators invested in human capital while India, a democracy has systematically neglected human capital. Furthermore it was found that investments (even by an autocrat) in human capital ultimately ushered in better institutions.

The Industrial Revolution

In the Great Divergence or the Reversal of Fortunes of countries, the Industrial Revolution (IR) in Britain played a major role. Thus, the inquiry into the causes of any one of these phenomena turns out to be an inquiry into all the three. It should be clarified that during the IR the annual rates of per capita growth of the economy or the industrial sector in Britain were modest, not more than 2% and 3% respectively (Crafts, 1985). However these rates of growth were sustained for more than a century, which was unprecedented in the world. The IR is therefore considered the first instance of modern economic growth. The IR did not lead to a revolutionary betterment of the living conditions of the masses in Western Europe. In fact, there is evidence of mass suffering during the period of the IR. The mass prosperity of the west is a relatively recent phenomenon beginning in the middle of the twentieth century. However, the IR meant many interrelated processes which were crucial in the development of the capitalist system. The organization of society, values, social relations, incentives, micro and macro aspects of industry and economy as a whole and technology underwent revolutionary, though relatively slow changes. Innovations and technological progress were hugely incentivized and there was a sharp rise in the number of patents registered. According to some economists and historians, the most fundamental aspect of the IR was the substitution of inorganic energy (coal and steam power) for human and animal muscles in the process of production. Before the IR, all work was either done by human muscles or animal power. With the IR, muscle power was replaced by inorganic energy. This was indeed a revolutionary step. Of course, there were many other aspects of the IR which were revolutionary in themselves.

Various factors contributed to the IR and hence to the Great Divergence and the Reversal of Fortunes. Many historians have forcefully argued that in so far as the level of economic development is concerned, till the end of the eighteenth century, the most advanced parts of China and India were not behind the most advanced areas of Western Europe (Pomeranz, 2000, Bin Wong, 1997, and Parthasarathi, 2011). The most advanced area of China, the Yangzi river delta in the south had reached a state of economic development comparable to that of Western Europe’s most advanced regions in the eighteenth century. Both areas faced similar ecological pressures. Both had high population density, both were short of land, forest cover and fuel. But in terms of ecology India was in a much better condition, with very good green forest cover even in the densely populated river deltas. In terms of technology of production of goods for mass consumption, China and India were ahead of Western Europe in the eighteenth century. In fact, the most important good of mass consumption traded internationally was cotton textiles produced in India. In the middle of the eighteenth century India was the second most important producer and exporter of manufactures while China was the most important. In addition, the Chinese state followed enlightened principles of political economy, cared for the welfare of the masses and promoted regional balance in economic development. In this situation, prospects of growth due to or based on only internal forces were limited in Asia as well as Europe. Two fortuitous factors/ developments helped Western Europe to forge ahead and overtake Asia. These were the discovery and colonization of the “new world”, mainly the Americas, and the availability of cheap but high quality coal in Britain, close to her industrial area namely Manchester (Pomeranz, 2000).

Benefits of Colonialism and Geography

The Americas were conquered by Western Europe using superior means of warfare (guns), deceit and germs unleashed by them on the local American population which did not have a prior exposure to these diseases and hence lacked immunity. This was perhaps the first recorded instance of biological warfare in history. The Europeans gifted blankets used by victims of small pox to the unsuspecting local Americans (Diamond, 1997). The new diseases extinguished the vast majority of the locals. Western Europe extracted many great benefits from the new world, apart from the loot of treasure. The new world’s large tracts of mainly virgin land provided the food (potato, maize etc.), tobacco, coffee and raw materials (raw cotton) to Europe which she was incapable of producing. Simultaneously, the new world provided escape for the surplus population of Western Europe who migrated to and settled there. Thus, the new world’s abundantly rich natural resources were vigorously used for the benefit of Western Europe. The nutritional level of her population and hence their life expectancy increased dramatically much before the coming of modern medicine, due to the new items of food supplied by the new world. On the other hand, China neither had the benefits of any colony nor was its major coal deposits located (in northern China) near its most industrialized part, namely the Yangzi delta (in southern China). Thus geography (availability of coal) did play some role in the Great Divergence. However, the discovery and exploitation of the new world was neither fortuitous nor a geographical phenomenon. Later in this paper we have to explain why Western Europe achieved these and other feats of colonization.

Richard Allen (2011) has constructed an impressive thesis around the crucial role played by coal in the IR. After all, the IR WAS British. Allen argues that the IR took place in the British islands only because of certain features peculiar to the British economy. And due to the lack of the same features, the IR could not have taken place anywhere else. What are these features characterizing the British society and economy? Allen says that the wage-energy (coal) price ratio was unique, the highest, in Britain. The wage rates, nominal as well as real, in London were the highest in Europe (with the exception of Amsterdam till 1775) and in the world from the eighteenth century. High wages meant large demand for commodities, better nutrition and a more efficient work force. Plus, with higher incomes the workers and their children could obtain more education. The price of coal in New Castle, in Britain, was the lowest in Europe and in the world. The opposite were the cases of China and India. In both these countries, labor was very cheap and energy and capital expensive. Similarly, wage to price of capital (rate of interest) ratio was also the highest in Britain. Hence, Britain had the strongest incentive for inventing capital and energy intensive and labor replacing technology. That is what happened. Why was the price of coal the lowest in New Castle? It was because of the very good quality, abundant coal supply which was easy to mine. In fact, the huge production of cheap coal, or the coal industry itself, in Britain developed in response to the fast growth of the prosperous city of London where coal was in great demand. And, why were the wage rates in London the highest in the world? The cause was Britain’s extraordinary success in international trade and exploitation which immensely raised the standard of living of the British population. In fact, the British were the most successful in exploiting the international trade and economy. This latter theme needs further explanation later in this survey.

At the beginning of the nineteenth century, Western Europe had colonized more than one-third of the globe (in Asia, Africa, Americas and Oceania) and controlled the profitable trade routes (Parker, 1996). Despite the labored and inventive denials by the westerners, it is well accepted that these colonies were a great advantage to Western Europe from the sixteenth century. First, massive wealth in the form of gold and silver and other precious objects were looted by the colonizers, initially and mainly from America but later from India and the other colonies. This wealth was used in international trade of Asian goods which was very profitable. This resulted in accumulation of enormous wealth in Western Europe, decline in the rate of interest on capital and a general rise in the standard of living. The colonies also provided agricultural goods which Western Europe was in great need of but could not produce due to unsuitability of its climate and shortage of land. The production of these crops was done under a new system. Great ingenuity was displayed by the Western European elite in devising this system which created a new division of labor in the international economy.

The colonies were made to produce food and raw materials for European industry, trade and consumption of Europe’s population. Sugar and rum came to be produced in the West Indian islands using African slave labor, for selling in the rest of the world. Raw cotton needed for the British cotton industry was produced in the American south using slave (black) labor imported from Africa. There was a trade in African slaves even before the Europeans intervened. But the scale of this trade went up hugely to supply labor to the Americas. About an estimated one-third of these slaves were purchased against cotton textiles bought from India by the Europeans. After the abolition of slavery, indentured labor from India and other colonies were sent to the sugar plantations. During the nineteenth century, in order to make the Chinese people consume opium, illegally, the British rulers got the poor peasants of eastern India to cultivate this crop using various coercive mechanisms. The British government of India which had a monopoly of the opium trade bought the produce from the poor peasants at very low prices, using India’s land revenue, and sold it at high prices in China to pay for the imports of Chinese goods. About the middle of the nineteenth century, two major wars called “Opium Wars” were inflicted on the Chinese to force them to consume opium, which was banned in China! Till then, China had a large trade surplus with Europe which had to be balanced by the import of bullion into China. Now, Chinese goods were paid for by importing opium from eastern India.

Another aspect which has been relatively neglected in this debate is the transfer of scientific knowledge and technology from the colonies to Europe. For long it is fashionable to think of the West as the leaders in science and technology (and as if forever). Patents and Intellectual Property Rights (IPR) are designed to maintain and build the lead of the West in producing high-tech commodities. But it was not like this always in history. China and India were the leaders in science and technology for long. Colonization enabled Western Europe to loot or transfer vital technology from the colonies without any hindrance. The case of cotton textiles, which was the first industry for mass-scale production in the IR and was crucial to the relation between India and Britain, is highly illuminating here. Neither Britain nor Western Europe was capable of producing raw cotton. Before the British established factories in India they had no knowledge of spinning, weaving and the other key elements in the production of cotton textiles. It is a tribute to the ingenuity of the British elite that they thought of and methodically went on to become the manufacturing leaders of the world in the field of cotton textiles. For centuries, India’s cotton textiles were the single most important item of manufactures consumed all over the world. Thus, the first principal commodity produced by the industrial revolution was not invented.

Britain could produce a piece of cotton cloth only in 1770. This event took place about 13 years after the British conquest of Bengal (in 1757) which was the leading exporter of cotton textiles till the end of the eighteenth century. And only during the twentieth century, cotton cloth, manufactured by the British factories could out-compete the handmade cloth from India in the world market. The details of technology transfer from India in general and in the field of cotton textiles in particular are not in the public domain yet. However, it can be safely surmised that colonization facilitated this. From the nineteenth century, India and the other colonies also provided crucial markets for the manufactures (including cotton textiles) of Britain and other Western powers.

Military Power and Open Ocean Navigation

In the debate on the Great Divergence or the Reversal of Fortunes, it is often asked that if China and India were the economic, scientific and technological leaders of the world and if they were ahead of Western Europe till the beginning of the IR, then why did they not colonize Western Europe and the new world? Instead, why did Western Europe colonize the “new world”, Africa and Asia? While it is agreed that in manufacturing of goods of mass consumption, China and India were the leaders till the end of the eighteenth century, it is also common knowledge that Western Europe had superiority or comparative and even an absolute advantage in violence or warfare. In colonizing one-third of the world, Western Europe had demonstrated its superiority in open ocean navigation and naval warfare by the end of the fifteenth century. Why did Western Europe have this advantage? Historians agree that China’s naval suicide in 1433 played a major role in it. When the Chinese emperor decided to burn all ocean going ships, it possessed an impressive fleet. Admiral Zheng He had performed several voyages in the Indian Ocean using more than 300 ships each time; the largest ships were 400 feet long. The man-power of each of these voyages consisted of more than 27000 crewmen, a fleet and a manpower which were not matched anywhere else in a single voyage until the twentieth century. Compared to the large Chinese ships Columbus’ ship at the end of the fifteenth century which discovered America was only 85 feet long. Historians continue to debate the causes of the Chinese naval suicide. It was not a mad decision as it may appear now. Perhaps, China’s existing political economy was no longer in need of it.

There were many reasons for the superiority of Western Europe in using gun powder, in open ocean navigation and in naval warfare. Unlike in China and India, there was no large empire in Western Europe because there was no large river valley to support it. In the small empires or the kingdoms of Europe, the Kings had no independent source of large incomes, unlike in the land based large centralized empires in Asia. While in Asia, the emperor collected the land revenues, which were huge, in Europe the feudal lords collected rent from land. Hence, the economic interests of the merchants and the kings coincided in Western Europe as both wanted profits from trade. On the other hand, the Asian empires discouraged and controlled the growth of independent port cities and large merchants.

The smaller kingdoms of Western Europe were continuously at war with each other during the feudal period. However, no defeated country or power was totally decimated. The wars were like tournaments. The winner had a huge prize but the losers survived to fight another day. And, no supreme power was allowed to emerge as others combined to fight and limit the powers of a potentially dominating power. The incessant warfare meant that huge state revenues were devoted to war and armaments. The best brains were drawn to military activities. As a consequence there was rapid development in the military technology, means of warfare and strategy and many other related spheres including finance and financial markets. In the West, war was considered the mother of all things. Although China had invented gunpowder, the Western Europeans perfected this technology through their practice. On the other hand, the principal threats faced by China (and India) were from the nomads of the Central Asian steppes. The nomads did not use gun powder. They used fast moving light horses and accurate archery from horseback. Hence there was no urgent need in China to develop the gun powder technology. China instead built its Great Wall to obstruct the nomads, though that did not suffice in the long run. On the other hand, the nomads could not penetrate Western Europe beyond the Hungarian steppes because of the natural barriers. Thus, the adversary determined the technology of warfare (Hoffman, 2012).

Trade had developed and merchants profited hugely in the coastal city states of the Mediterranean during the late feudal period. The first of these port cities were in Italy. Initially, the Mediterranean merchants in Europe traded in goods brought by the Arabs from Asia. The land route to Asia was dominated by the strong Ottoman Empire. As the European merchants accumulated more wealth, the desire to obtain an independent ocean route to Asia and monopolize its trade arose. The Iberian countries (Spain and Portugal) which traversed the Mediterranean and the Atlantic Ocean were the best placed to do this as they had the dual advantage: knowledge of sea faring technology and openings to the Atlantic Ocean. But open ocean navigation required huge public investments as it was a public good. Knowledge obtained by one agent would over time be available to the others. The states of Spain and Portugal made these public investments in open ocean navigation and naval warfare. Thus, these states were the first to colonize.

Britain, the First Global Power

The first IR took place in the UK, neither in Spain nor in Portugal, the initial leaders in open ocean navigation. Portugal lost out because its major trade partner, the Vijay Nagar Empire, collapsed in mid-seventeenth century, and it was dominated on land by Spain and on the seas by Holland and England. Spain spent too much of its wealth on unproductive ways and frittered away its wealth. The Spanish Armada was defeated by the British navy with help from their Dutch allies in 1588. A series of naval wars between Spain and Britain weakened Spain. Britain a late starter in the game of military backed trade ultimately came first in the race for economic and political dominance of the world. Which factors caused this? The argument that ‘institutions cause economic growth’ was first advanced by North and others using the British case as the first and prime example and in contrast with Spain and Portugal. However, lots of leading economic historians including Robert Allen, Gregory Clark, Nicholas Crafts, Ronald Findlay and Kevin O’Rourke are not convinced of any tight connection between institutional change and industrialization.

For nearly 200 years it has been propagated and believed that the IR was a triumph of British science, inventiveness and entrepreneurship, promoted by the political economy of free markets and liberalization. During the decades of Cold War between the Western block and the Soviet block the main theme for ideological propaganda by the West was that the British/Western path to economic development was through free minds, free markets, economic rationality, institutions favoring increase in productivity and liberal democracy, as opposed to dictatorship and state directed command structures controlling economic activities. After the fall of socialism the theme of capitalistic freedom has received greater vigor.

However, we have found the actual story to be different. The above propaganda material is difficult to hold on to, after some scrutiny. The first remarkable thing about Britain is the cleverness of its elite. The British merchants convinced the British king and the state very early to build the most powerful navy in the world. And, the British crown owned shares in the pirate ships which looted the Spanish and Portuguese ships carrying precious metals from their colonies in America. Britain’s powerful elite gained political control in as early as 1688 through the ‘Glorious Revolution’ and got to learn a lot of useful things from the Dutch. The alliance of the state and the merchants in Britain seems to have been the most imaginative and the most effective in the world. At its peak, Britain governed one-quarter of the world’s land surface and an equal share of the world population. It had the largest empire in history. It is imperative to notice that in Britain’s rise as a global power, vital roles were played by military-backed global trading supremacy, the slave trade, and colonies in general and the control of India in particular. In the words of a well known historian, India was a whole diamond mine for the British. In addition, there were crucial favorable factors like geographical location and resource endowments, and exploitation of labor within and outside Britain. Being an island, it was protected from the ravages of war on land. Thus it escaped the destructions to which Western Europe was subjected to during the incessant wars for several centuries preceding 1815.

For centuries the British state was the most interventionist state in Western Europe, though the state’s role has been deliberately downplayed by historians and economists for long. Gradually a rule of law was established in Britain. Between 1670 and 1815, British national income increased three fold but state revenue from taxes rose 17 times! Generally taxes were indirect (custom and excise) and regressive. Taxes on land were low and till 1840s there was no income tax, except for the war period of 1799 to 1816. The common British people were the most taxed people in the world. Many goods were taxed. Tax evasion and smuggling were dealt with in innovative ways which improved the state’s financial machinery. With this a lot of other things including crucial infrastructure, human capital, many aspects of state craft and public finance developed. The state followed aggressive mercantilist policies to benefit monopoly trade and colonialism. Between 1670 and 1819 Britain fought eleven wars against its trade rivals and dominated them one by one. By 1819 Britain’s national debt was about three times its national income. In 1816, with the defeat of Napoleon, Britain became the undisputed military, political and economic leader of the world for the next century. The British state provided protected and assured demand for many industries. Government orders for military goods- iron, ships, sails, cordage, and uniforms- boosted demand for many industries. Britain’s huge success in the international economy made incomes and wages in Britain the highest in the world. The British wages were on average well above the minimum subsistence levels; these promoted nutrition, education, skills, demand for commodities and labor saving technology. But British labor was subjected to harsh discipline and it lacked many rights. Thousands of Britons were simply pressed into the army and navy to serve and support their country all over the globe (Hudson, 2011). Besides, India was an inexhaustible reservoir of man power for the British military.

Agriculture played a crucial role in the industrial development of Britain. Yields in agriculture were high in comparison with other countries. High yields enabled high levels of animal husbandry and use of horse power and hence higher value of output. Agricultural productivity was improved by mixed farming and crop rotations and institutional changes brought in by enclosures and enlargement of farms. In the late eighteenth century, agriculture was profitable due to high demand for food arising from population growth and urbanization. Landowners invested their surplus in industry and transport. The surplus population on land provided the growing workforce in industry. Although the shift from agriculture to industry was important, growth of the service sector was equally significant. From the beginning, finance and insurance were growing in Britain. This has been an enduring feature of the British economy. The growth of employment in the service sector, including retail and wholesale trade, transport, banking and insurance, was equally an emblem of the industrial revolution.

Britain’s aggressive, ingenuous and methodical colonialism brought enormous benefits to it. It invented new international divisions of labor and relocated the center of manufacturing from the east to the west. The British trade policies were far from the much flaunted text book doctrine of free trade. Using strong protective tariff walls, Britain developed its flagship cotton industry. While its infant industry was growing up under heavy protection against Indian textiles, it was systematically learning the necessary steps in manufacturing cotton textiles. All these while, Britain continued to sell the highly profitable Indian textiles in the rest of the world. It used all means, fair and unfair, to gain useful technical knowledge and wealth from all countries. Technology and ideas were obtained particularly from India, China, France and the Netherlands. The British state created the necessary infrastructure and incentive mechanisms including patent rights which hugely promoted innovations. Of course, it was helped by its good fortune in having large deposits of high quality coal which made energy very cheap there. It promoted capital and energy intensive technology. This was the background for steam power innovation to come. Britain could produce its first piece of white cotton cloth only in 1770 and become competitive in cotton industry only in the nineteenth century.

Conclusion

The story of modern economic development only started with the IR in Britain. Soon Germany, France and other countries of Western Europe followed Britain. Germany achieved great success and challenged Britain’s economic and military power. This led to the two World Wars. Japan and the former USSR also showed spectacular growth rates for long periods. The Second World War saw the rise to preeminence of the USA, which had many unique advantages. By the end of this war, the USA became the military and economic leader of the world. It has continued like that since then, though its dominance seems to be waning slowly. A very large number of learned people believe that China is set to overtake the USA in not so distant a future.

Through the process of modern economic growth ushered in by the IR, a transition from feudalism to capitalism took place. This resulted in a massive expansion in the number and quantity of goods produced. Thus, the material conditions of life and the levels of consumption increased significantly. However, the process also included destruction of life and property, deprivations, displacement of people and severe drain on the natural resources. It has also meant phenomenal increase in inequalities of many kinds, including inter-personal, regional and international. A small minority seems to have appropriated the bulk of the material gains of economic development.

At the end of this article one may legitimately ask, which factors played the most important role in ‘the industrial revolution’, ‘the reversal of fortunes’ and ‘the great divergence’? It should be clear that looting of wealth was necessary but not enough for Britain’s or Western Europe’s success. The ancient cultures if Asia, India and China, had enormous wealth and similarly the Aztecs and Incas of America had huge wealth. But these countries did not experience modern economic development. Neither aggression nor military strength is enough in itself. The central Asian nomads were aggressive and cruel and had founded large empires which lasted long. But they did not bring in economic development. Many other crucial factors were also necessary for economic development.

In conclusion, some factors stand out and are found to be common in the major success stories so far. These are geographical and historical conditions, political economy, strong military capability, and its copious use along with cruelty, cunning, and deception, wisdom and foresight of the elite, exploitation of international resources including knowledge and technology, manipulation of international trade, investments in human capital, skills, science, technology, infrastructure and creation of right institutions and incentives for productive activity and disciplined hard work by the labor force.

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Professor, Centre for Economic Studies and Planning, Jawaharlal Nehru University, Delhi