This is almost similar to the MINT article I wrote on Tuesday (Feb.9,2015):
I have read Peter Temin’s excellent paper on Economic Development and Economic History. I have referenced it in earlier posts. It was wonderfully insightful for me because it traced the British Industrial Revolution to the Plague of the 14th to 16th centuries in Europe. It had great insights on African slave trade and their economic performance. It gave me some good further references to follow up.
Then, I read the first two chapters of the New Economics Curriculum developed, through joint effort, at the Institute for New Economic Thinking. The Chapter 2, in particular, gave me a lot of reference material to download for later reading. [The chapters have been updated as of January 2015 and the number of chapters has gone up to 16. You can find them all here. There is a simple registration process.]
I then listened to the hour-long lecture by Prof. Robert C. Allen (in four parts), as I had mentioned in the 2nd post on Economic History. He says that North America and Western Continental Europe caught up with the British Industrial Revolution by adopting the following:
- Internal free market (elimination of internal tariffs) – national single market (for India GST helps – no wonder so many are resisting – foreign hand too in the resistance?)
- Stable domestic banking system
- High external tariff
- Universal Education
They did not catch up practising free trade and open capital markets. Surprise, surprise.
Up to 1750 AD, India and China contributed more than half the world’s manufacturing. These two nations contributed around 70% of 80% of the global population up to the 19th century. Naturally, their manufacturing was labour-intensive.
The West leapfrogged in the 19th century with capital and technology simply because real wages became too high in the UK and substituting capital made a lot of sense. Necessity became the mother of invention. Full credit to them. One must note here that other countries which did not have such high real wages (and cheap energy) as the UK were slow to get on to the industrialisation bandwagon.
Then, they used colonies to import raw material for their capital intensive production. For example, India supplied raw cotton and imported Manchester cotton fabric and clothing. Britain maintained fragmented internal market in India to collect revenues. It brought down India’ external barriers to allow free import of British-made goods. Nor did it invest in India’ education or banking. It invested in Railways to collect Indian raw material for transshipment to Britain at Indian seaports.
A good question to ask is why today’s developing countries did not emulate these above five points, after they became independent. They tried with half a heart, in most cases. Most likely because many of their policy and business elites would have found a way to profit from their association with Western growth as exporters of raw materials exploiting cheap local labour. There is also the elitism that comes with keeping economic growth and its fruits away from wider circulation. Well-meaning but eventually counterproductive emphasis on higher education after Independence also fed this elitism (e.g., India). Therefore, half-hearted attempts led to half-baked output.
Further, the capital intensity of production needed to serve large domestic markets became so high that high external tariffs unfortunately ended up creating fragmented and inefficient domestic industries of insufficient scale. Exceptions were to be found mainly in East Asia – Japan, Korea, Taiwan and now China.
Having grown with capital intensive technology and cheap capital, Western nations also turned against the labour cost advantage of the developing nations post-1990. It shows how morally hollow and inconsistent were the arguments advanced by the West against offshoring or outsourcing.
The recent collapse in fossil fuels will help developing countries to catch up. Of course, climate change concern is a big bummer. There too, they have put the current developing world in a bind.
That is why India has to find out how to capitalise on its Thorium reserves. Cheap energy played a big role in driving Western prosperity. Given its size, India needs one such source too. What is India doing about it?
But, short of a plague or War that creates a labour shortage, resistance of labour to technology and scale would remain in India and in other developing countries where labour is cheap relative to capital.
Therefore, the chances are high that countries such as India (and even China), given climate change risks and their huge sizes, may never indeed catch up. These two countries are short on energy resources and water too. North America and Europe were not constrained in this manner in comparative stages of development. Britain could burn coal copiously and industrialise without worrying about CO2 emissions.
Today’s developing nations are fighting very high odds of ‘making’ it. That is why it does not appear smart to wager on the outcome that India and China recapture their share of global economic and/or manufacturing output of the 18th century or early 19th century, by the end of 2100.