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ECONOMIC HISTORY
TOPIC 1: INTRODUCTION.
Economic history : tools to describe economies in the long-run. Apply economic theories to long term development.
•
Economic agents try to avoid uncertainty. Initially consumers/political decision makers tend to imitate first movers.
•
Cost-minimization by firms: easier to find employees with certain skills if technologies are standardized.
•
Economies of scale due to large production volumes decrease price of innovative technologies.
Path dependence : idea that decisions we are faced with depend on past knowledge trajectory and decisions made, and are thus limited by the current competence base. In other words, history matters for current decision-making situations and has a strong influence on strategic planning.
Structural break : unexpected change over time in the parameters of linear time series regression or panel data regression models, which can lead to huge forecasting errors and unreliability of the model in general.
Law of diminishing marginal returns: at some point, adding an additional factor of production results in smaller increases in output.
TOPIC 2: GROWTH (2) MEASURING ECONOMIC GROWTH AND DEVELOPMENT IN THE LONG RUN
Economic Growth: long-term process of sustained increase in the level of real income per capita in a certain economy.
2.0.
GDP: Total expenditure on domestically-produced final goods and services. Indicator for national income/productivity.
Things to be careful about when using GDP:
−
Use REAL GDP.
−
Adjust for SIZE EFFECTS.
−
Think about TIME EFFECTS.
−
Never forget to adjust for population size (i.e. compute per capita GDP) if you want to compare
(average) household income.
−
Remember that higher frequency data (e.g. quaterly) have to be seasonally adjusted unless you make sure you always measure them at the same time.
Nominal GDP : total production of goods and services valued at current prices.
Current prices = prices of each year.
Real GDP : total production of goods and services valued at constant prices.
Constant prices ==prices of the base year
As long as inflation/deflation is moderate, real and nominal GDP are close, not always the case.
GDP per capita : measure of a country's economic output that accounts for its number of people. Most widely used indicator of economic development.
Advantages:
− Intuitive measure (“Total output per person”).
−
Fairly objective.
−
Available for most countries since WW2 or even earlier.
−
Many estimations for earlier periods.
− Relatively accurate and standardized across countries (at least today…)
Disadvantages:
−
Does not consider distribution of income.
− Does not account for “quality of life”.
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ECONOMIC HISTORY
−
Fails to include goods/services which are not traded on markets.
−
Bad at measuring (certain) innovations.
−
Completely ignores what kinds of goods/services are produced (disasters and wars might INCREASE real GDP!)
2.1. Alternative meaures of economic development
Attempts to establish “broader indicators” of socio
-economic wellbeing.
(i) Human Development Index (HDI): summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable and have a decent standard of living. The geometric mean of normalized indices for each of the three dimensions.
(ii) Inclusive Wealth Index (IWI): Measure a nation´s total wealth across generations.
Comprehensive analysis of a country’s productive base, i.e. of all assets from which human well-being is derived, including manufactured, human and natural capital. In this, it measures a nation’s capacity to create and maintain human well-being over time.
(iii) World Development Indicators
Indirect indicators:
Problem : Due to limited data availability, it is hard (if not impossible!) to compute detailed indicators like the HDI or IWI for distant periods.
Alternative Approach : Rely on indirect indicators of income/ social development.
Most widely used
: Population and settlement data, anthropometric measures, educational indicators…
Census : procedure of systematically acquiring and recording information about the members of a given population. The term is used mostly in connection with national population and housing censuses; other common censuses include agriculture, business, and traffic censuses .
1. Anthropometric indicators:
Anthropometry (from Greek "human", and "measure"): measurement of the human individual.
Involves the systematic measurement of the physical properties of the human body, primarily dimensional descriptors of body size and shape.
2.
“Age heaping”
(educational indicators).
In underdeveloped economies, literacy and numeracy skills are typically rare. Therefore, respondents to a census often tend to report their age or date of birth as a round number (typically ending in 0 and 5). Age distribution appears to be distorted. Use degree of age heaping to infer level of education (and productivity/living standards)
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lOMoARcPSD|4544993
ECONOMIC HISTORY
Whipple index : measure the tendency for individuals to report their actual age.
𝑊𝐼 = (
∑𝑃𝑒𝑟𝑠𝑜𝑛𝑠 𝑎𝑔𝑒𝑑 23 − 62 𝑟𝑒𝑝𝑜𝑟𝑡𝑖𝑛𝑔 𝑎𝑔𝑒𝑠 𝑒𝑛𝑑𝑖𝑛𝑔 𝑖𝑛 0 𝑜𝑟5
∑𝑇𝑜𝑡𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑎𝑔𝑒𝑑 23 − 62
) ∙ 5 ∙ 100%
Potential causes for different levels of human capital investment:
-
-
Inequality in the distribution of land.
Economic structure and technology
Religion/Culture (Webster hypothesis)
Land inequality:
1.
Emergence of agricultural elites.
2. Institutions which serve elite interests (e.g. serfdom).
3. No incentives for landed elites to provide public goods (like free education).
4.
Majority of the population remains low-skilled → sluggish technological change and slow social progress.
5. Historical differences in access to land and/or capital.
2.2. Economic and political structure
‘Resource Curse’
–
Observation: Economies which specialize in the exploitation of natural resources (e.g. oil) tend to perform poorly in terms of education, health, social development and
–
ultimately
–
economic growth
–
Intution: Similar to land inequality → Highly unequal societies → little incentives for the elites to invest in public goods.
State Capacity
: government’s ability to enforce laws, collect taxes and provide public goods. Lacking state capacity therefore typically leads to an underdevelopped public education system.
Meas urement errors aren’t systematic.
TOPIC 3: PREINDUSTRIAL ECONOMY AND SOCIETY
−
Until c. 11,000 BC (for 99% of human history) humans were nomadic hunter-gatherers, who collected resources of a large plot of land (c. 8-
200 km² per head).
−
In the neolithic revolution man started to become a food producer (agriculture).
−
Until at least the 17th Century (in most cases much longer) the vast majority of humans worked in agriculture.
3.0. Two sources of Increases in total output:
1.
Extensive Growth: Output rises because use of inputs increases.
Aggregate production function : MPL = f ( L + 1 )
– f ( L )
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ECONOMIC HISTORY
Between 1000 and 1820, growth was extensive.
In Western Europe, population multiplied by 5 and
GDP by factor 15 (according to Maddison)
In the “non
-
Western world” population multiplied by factor
3.75, total GDP by factor 4.9.
2.
Intensive Growth: Output rises because any given combination of inputs is used more efficiently.
3.1. Malthusian Theory of Population : theory of exponential population growth and arithmetic food supply growth. He believed that through preventative checks and positive checks, the population would be controlled to balance the food supply with the population level.
Population/income
Model Assumptions:
(i) Exogenous and constant population growth.
(ii) Exogenous and constant productivity.
(iii) Unchecked population growth faster than extensive growth of agricultural production.
(iv) Result: Stagnating per-capita income in the long-run.
Preventive check : restrict births to enjoy decent living standards.
Positive checks : increase mortality and thereby reduce population.
This lead to premature death such as disease, starvation and war, resulting in what is called a Malthusian catastrophe. The catastrophe would return population to a lower, more "sustainable", level.
3.1.1. Neo-Malthusianism : advocacy of population control programs to ensure resources for current and future populations. Neo-Malthusians (e.g. Gregory Clark: “A Farewell to Alms”)
Claims:
− “the average person before 1800 was no better off than the average person of 100,000 BC
.”
− “Life expectancy was no higher in 1800 than for hunter-gatherers: thirty to thirty-five years. Stature, a measure both of the quality of diet and of child ren’s exposure to diseases, was higher in the Stone Age than in 1800
”.
→ War, violence, disorder, harvest failures, collapsed public infrastructures, bad sanitation
–
are good , because they reduce population pressures and increase material living standards.
Assumptions:
(i) Birth rates differ across (pre-industrial) societies because of cultural reasons, but increase with living standards.
(ii) Death rates decline as living standards increase.
(iii) Material living standards decline if population increases
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ECONOMIC HISTORY
3.1.2. Malthusian population dynamics cannot have been the only causes of slow income growth in the preindustrial period.
Reasons:
−
Data show slow but notable increase in both population and income levels.
−
Endogenous adjustments of fertility probably more important than assumed by Malthusianists.
−
Population growth might contribute to intensification of economic growth.
3.1.3.The Clark model:
Y * = subsistence income, allows the population to reproduce itself.
At higher income levels, population increases.
If population increases, income falls and leads society back to the equilibrium population.
3.1.4. Boserup's theory : posits that population change drives the intensity of agricultural production. Her position countered the Malthusian theory that agricultural methods determine population via limits on food supply.
3.2. Endogenous Fertility and Mortality
Malthus (and the Neo-Malthusians) assume that fertility and mortality are mostly dependent on income.
But: The surviving sources show that “preventive checks” might have set in before subsistence income was reached. This is particularly true in Western Europe ( → European Marriage Pattern).
Birth rates and investment in children’s human capital reacted VERY sensitively to economical, social and epidemiological conditions.
3.2.3. Demographic transition.
3.3
. Economic information from physiological data:
•
Nutritional status of various social groups.
−
Real income
−
Occupation-specific income series.
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ECONOMIC HISTORY
−
Inequality among different social status, ethnicities, ages or gender.
•
Sources of information:
− Military récords.
− Slave récords.
−
Cost-of-living surveys.
−
Surveys of children in public and charitable institutions.
3.3.1.
Selection bias
: the sample of data available doesn’t reflect the characteristics of the population under study with enough accuracy. Both upwards and downwards bias is possible (depending on circumstances).
Bias is always systematic. It can be fixed through the increase of data coverage or try to asses which “statistical “moments” of the sample distribution differ from the “true” population values.
Potential biases of data:
(i) Selection bias:
Sample selection.
Self-selection of sample population.
(ii) Statistical distribution of the data:
-
“Truncated” sample
Can be ‘corrected’ if:
1.
We know the “type” of the distribution or if we deal with large samples (Reason: Large samples are approximately normal distributed).
2.
If we have information about the point at which the distribution is “cut
-off.
-
“Baskethall” problem.
Normal distribution, but arguably “cut
off” at its lower tail.
(iii) Measurement errors: not systematic, can be controlled.
Reporting error.
Heaping.
Missing information on circumstances of data collection.
σ
= standard deviation : measure of dispersion in your data.
Measurement errors increase
σ, but if you take the sample average µ, you will still be able to estimate the population mean correctly.
3.3.2. Hight inequality across time.
−
Kuznets curve : graphs the hypothesis that as an economy develops, market forces first increase and then decrease economic inequality.
−
Paper: Urban vs rural heights in USA, white collar vs blue collar heights.
−
1820-1861 raising height gap in USA (later industrial development), diminishing in Great Britain (first country to industrialize).
3.4. Black death : one of the most devastating pandemics in human history, resulting in the deaths of an estimated 75 to 200 million people in Eurasia and peaking in Europe from 1347 to 1351.
−
Rapid spread across Europe.
−
High death toll (depending on the affected region 30%-60% of the population die).
−
High incidence among the young (first pandemic: 33% aged <12, third pandemic: 88%).
−
Local outbreaks typically preceded by famine/ bad harvests.
−
Often followed by religious hysteria, prosecution of minorities, social and political conflict,…
Epidemics: Some economists claim that high mortality rates might be beneficial for underdevelopped countries.
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ECONOMIC HISTORY
Conequences (development):
−
Labor shortage temporarily increased rural living standards.
Real income increased (although less than assumed in the older literature) → Higher demand for superior goods → urbanization, growth of manufacturing industries.
−
Recurrent epidemics and their impact on the labor market reward flexible and competitive business organization.
−
In some regions: Decline of the manor system, labor-saving agricultural innovations.
−
But: In other parts of Europe → “Second Serfdom”
− Consequence: Whether or not the “Malthusian benefits” could be reaped depended on the interaction between the population shock and (pre-existing) institutional characteristics.
TOPIC 4: GROWTH-INHIBITING INSTITUTIONS IN PRE-INDUSTRIAL EUROPE
4.0. Causes of persistent institutional inefficiency
Trade costs:
−
Transaction costs (finding a partner, making sure he pays, etc.)
−
Transport costs (moving goods in space, infrastructure.)
−
Financing trade
“Market failures”:
−
Occur when a market exchange affects the wellbeing of more than just the contract partners ( → “externality”)
− private benefits/costs ≠ social benefits/costs
Institutions and Incentives in Pre-Industrial Europe
Number of institutions that set incentives which might have prevented allocative efficiency: Common/insecure property rights. Administrative/economic fragmentation. Estate society/lack of civic and economic liberties. Serfdom.
4.0.1. Manor Economy:
Lords had a conditional grant of land tenure in return for military services to overlords like the king.
Peasants were given a conditional grant of tenure (land rights) in return for compulsory labor services. They were serfs and could not leave their land or marriage without permission. Although were typically allowed to use part of the assigned land for private production. These plots were scattered around the village. Villagers could collectively use c ertain plots/ forests/ lakes/ pastures…
4.0.2.
Insecure/ undefined Property Rights and the “Tragedy of the Commons”
−
All members of the community (e.g. village) are free to graze cattle on common land.
−
Nobody can be excluded, no limits to number of cattle every individual may graze on the common plot.
−
Problem : Pasture is a public good → Users tend to overuse it/ underinvest in maintenance
(“negative externality”).
−
Result : Land deteriorates, becomes overgrazed and eventually cattle die off due to starvation.
Reasons for change:
1
.“Black Death”
Economic Consequences of the Black Death:
−
Population falls by 30-60%.
−
Labor becomes extremely scarce.
−
Lords try to reinforce peasant duties
→ In eastern and parts of southern Europe: Stricter enforcement of serfdom.
→ In Western Europe: Lords fail and peasants improve their bargaining position.
−
(Western Europe) Increase in peasant wages.
−
Lords switch to less labor intensive products.
− Increased cultivation of “cash
crops” → Agriculture becomes more market orientated.
2.Urbanization and emergence of (new) markets:
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ECONOMIC HISTORY
(i) Middle Ages: Feudalism → Lords seek to bond peasants to land.
(ii)
Black Death, Income↑ New Agricultural Techniques, Emergence of Marketsю
(iii)
Gains from Increased Agricultural Productivity↑↑.
(iv) Serfdom Gradually Replaced by Land rent Contracts. Privatization of Common Lands “Enclosures”.
(v) Peasants and Lords alike Would Benefit from Institutional
Change.
These institutional reforms took a long time: England till the late 17th century, in continental Europe at least till the French Revolution/ Napoleonic
Wars.
Consequences : Agricultural Productivity in Prussia after Abolishment of
Serfdom. (graph)
4.1. Growthinhibiting institutions II: “Weak states”
Problem : without public order there is violence, anarchy conflict.
−
Strong state is necessary to guarantee social order (prevent free riding by citizens and provide public goods).
−
It can extract a large share of the surplus generated by the economy (for example by not repaying debts) for its own consumption, thus limiting growth potential.
− Need to have a “Leviatan” (strong state) but make sure you constrain his powers.
4.1.1.
Case 1: The “Glorious Revolution in England”
Institutional set-up: after the death of Elisabeth I, conflict between the Crown and representative bodies (Parliament, common law courts).
Under Elisabeth’s rule
: High concentration of power in the Crown: quasi-legislative powers (Royal prerogative superior to parliament), no independent justice, Queen free to set the budget/taxation.
Events:
(i) Civil War and execution of Charles I (1649).
(ii) Commonwealth (Republic based on military rule) under Oliver Cromwell.
(iii) Royal restoration under Stuarts (1660).
(iv) Plitical conflict.
(v) William III Orange (Dutch stadtholder) invited by the Parliament to become King: the ‘Glori ous Revolution’ (1688).
Institutional Reform: the Bill of Rights
1.
Parliamentary supremacy.
2. The Crown cannot disband Parliament at discretion.
3. Parliament gains central role in financial matters (taxation).
4.
Parliamentary power to oversee expenditure.
5.
Judges independent from Crown .
6. Political rights as a key element in the protection against arbitrary violations of economic rights.
Consequences :
−
N ew institutional balance made the government’s commitment to secure property rights more credible
→ a constrained government is also a more predictable government.
−
According to North and Weingast (1990): By reducing the cost of capital: after the Revolution, rise in the volume and decline in the cost of borrowing by the English government = reduced risk premium.
−
Rule of law sets incentives for investment in physical AND human capital.
4.1.2.
Growth-inhibiting institutions 3: Territorial (and administrative) fragmentation
Problem : Fragmentation (typically) comes along with tariffs and economic restrictions.
Consequences :
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ECONOMIC HISTORY
−
High transaction costs.
−
If at all, small markets → little specialization.
−
Reduced competition.
−
Inefficient allocation of resources.
4.1.3
. Case 3: Territorial Fragmentation in Germany
−
1157-
1806: “Holy Roman Empire”
−
More than 200 independent states.
−
Internal tariffs.
−
No common body of law.
−
No common currency.
−
Different weights and measurements.
Reasons for fragmentation persistence:
Intuition - Game theory: If there are no binding contracts, non-cooperation pays off. Moreover, weak central states/rulers benefit from fragmentation because this weakens their opponents.
4.2.Pre-industrial institutions often hampered growth because they reduced social mobility, increased investment risk, increased transaction costs and prevented competition.
Measures to try to quantify the economic impact of improved institutions (e.g. less corruption, rule of law)
−
Interest rates as a measure of perceived market risk.
−
Credible commitment: Falling interest rate on government debt.
−
Government Finance before the Revolution: Forced Loans with systematic default
→ high risk = high interest rate.
4.3. Growth accounting : technique which allows us to identify intensive growth and extensive growth in (historical) economic data.
Steps:
1.
Assume production function is (approximately) homogenous with constant returns to scale in all factors (that means that Y increases by 1% if all inputs increase by 1%
2.
Take the ‘total differential’ of the production function:
𝜕𝐹(𝐾,𝐿,𝑇)
𝜕𝐾
𝜕𝐹(𝐾,𝐿,𝑇)
𝜕𝐿
𝜕𝐹(𝐾,𝐿,𝑇)
𝜕𝐿
(X is zero if there is only extensive growth)
3. Divide by Y to obtain %-changes 𝑑𝑌
𝑌
= 𝜔 𝑘 𝑑𝐾
𝐾
+ 𝜔
𝐿 𝑑𝐿
𝐿
+ 𝜔
𝑇 𝑑𝑇
𝑇
+ TFP
%-Change in GDP = %-Change in all inputs + TFP
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ECONOMIC HISTORY
4.3.2.Finding weights 𝜔
𝐾
, 𝜔
𝐿
and 𝜔
𝑇
If there are competitive markets and if the production function is (approximately) homogenous with
CRS, the weights will be equal to the share of GDP which is paid to factor incomes.
Factor incomes : payment of labor, capital and land, equal to total value added. (The more a factor adds to total value added of the economy, the more you have to pay to obtain a bit of this factor).
− Labor receives “real wage”
− Capital receives “real interest”
− Land receives “real rent”
Productive Input: creates high value added, plays an “important” role in the economy, receives high factor income.
Less productive input: generates little value added, receives low factor income .
4.3.3. Empirical Strategy
1.
Collect data on GDP, population, capital and use of land.
2.
Find the respective factor incomes to estimate the economy’s production function →
𝑲
Y .
,
𝑳
𝑻
and
3.
Compute the growth rates of GDP, population, capital and land (if applicable) → %-Change in all inputs.
4.
Multiply the growth rates in factor inputs by the weights you estimated in step (2) → This is important because an input might increase by a lot and still fail to raise GDP substantially if it creates little value added.
5.
Substract total (weighted) input growth from GDP growth and…
6.
The resulting
‘residual’ gives you an estimate of TFP growth.
TOPIC 5: INDUSTRIAL REVOLUTION
5.0. Industrial revolution factors:
−
Social changes: demographic transition, new forms of labor/employment, change in consumption patterns,…
−
Economic changes: sustained, intensive growth (“Modern Economic Growth”)
, innovation, structural change.
−
Space changes: urbanization, market integration, division of la bor…
Engel's law : as income rises, the proportion of income spent on food falls, even if absolute expenditure on food rises. In other words, the income elasticity of demand of food is between 0 and 1. It suggests that consumers increase their expenditures for food products in percentage terms less than their increases in income.
5.1. British Industrious Revolution
1.
Income of “Industrial Elite”↑
2.
Demand for “Superior Goods”↑ → Multiplicator effect for manufacturing industries.
3.
Income of “Industrial Middle Class”↑
4.
Demand for “Superior Goods”↑ → Multiplicator effect for manufacturing industries.
5.
Income of “Industrial Working Class”↑
5.2. British Agricultural Revolution
Important Innovations:
−
Enclosures : legal process in England of consolidating (enclosing) small landholdings into larger farms.
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ECONOMIC HISTORY
− “Four field system” (=crop
rotation)
−
Fertilizer
− Selective breeding…
TOPIC 6: INDUSTRIAL REVOLUTION ENGLAND
Geographical and institutional characteristics lead to an early revolution.
6.0.1. Natural Resources
−
England was rich in natural resources (abundant iron and coal).
−
Leading sectors: wool, leather, construction.
–
England did not have cotton, but it could and was imported.
–
Other European countries had as many or even more resources as England. The resources had been there for millions of years. Resources can be a curse as much as a gift.
6.0.2.Trade
−
Key to obtain the products that could not be produced domestically (cotton).
−
Insignificant in the IR, as only around 5% of production exported
6.0.3.Education
−
Similar education levels in other countries of Europe.
−
Formal education was less important back then → “instantaneous” human capital formation.
−
France was the origin of most scientific advances and inventions. England was better adapting those macro-inventions into micro-inventions.
“For something to work it has to be first in vented in France and then perfected in England”
6.0.4.Institutions:
−
Power is in the parliament.
−
Modern administration:
•
Taxes paid by everyone.
•
Public debt.
−
Economic and political liberalism (laissez-faire)
−
Good and protected property rights.
6.1.Reasons for England to be staring the IR:
−
It was not better in everything.
−
It was the best taking the whole package. Being the best in everything is not required, but being very good in all the prerequisites is.
6.2. Characteristics of the British IR:
−
Not really a revolution, rather an evolution towards industrial society.
−
Key role of agricultural modernization → Decline of the manor system, “Enclosures”.
−
Long prelude of extensive growth (use of not fully exploited resources, esp. labor) → “Proto”
-Industrialization..
− Important role of “spontaneous” human capital (learning by doing).
− “Trickling down”
-effect as a central multiplicator.
−
Intensification only at the second stage of industrialization.
TOPIC 7: LATE DEVELOPMENT
7.0. Industrialization in other countries:
Advantages
−
Demand of Ind. Countries.
−
Import of Cheap Intermediate Products.
−
Growth through Immitation.
−
Import of Advanced Technologies.
Disadvantages
−
De-industrialization.
−
Brain Drain/ Capital Flight.
−
Competition of Ind. Countries.
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ECONOMIC HISTORY
7.1. Systematic Accumulation of Human Capital
Educational reform ( Example: Germany )
−
After Napoleonic Wars: Humboldtian Reforms → Aim: Ensure Germany’s “competitiveness” vis
-
à
-vis
France.
−
Contents:
(i)
“Democratization” and standardization of the educational system.
(ii) Replacement of
“winter schools” by regular primary schools.
(iii) Reform of curricula at all levels:
•
Primary school: Less religion, more practical skills, including writing, mathematics and
“Naturkunde” (nature studies)
•
Secondary schools: Broad set of theoretical competencies → teach students logic, academic self-reliance, creativity and flexibility (mathematics, philosophy, Latin, Greek, as well as modern languages, sciences and humanities)
•
Mandatory secondary schooling for apprentices as well.
•
University: Unity of Research and Teaching.
Example Japan:
−
Large-scale reforms after the forced opening 1854 and the Meiji Ishin 1868
− Aim: Ensure Japan’s economic and political independence
−
Contents:
(i) Mandatory schooling.
(ii) National unity through education.
(iii) Introduction of merit principle (educate highly-skilled civil servants).
(iv) Allow students to aquire skills to use foreign technology.
7.2. Investment and Infrastructure
Aim: Reduce transaction costs to create common markets and facilitate efficient allocation of resources
–
Abolish internal barriers to trade
– Create rational administration (“Weberian” civil service)
–
Provide common body of law
–
Ensure economic and civic liberties to encourage entrepreneurial activities
7.3. Optimal Foreign Trade:
Take advantage of specialization (“Smithian Growth”). Specialization/ Divison of Labor:
−
Save Time/ Use resources optimally
−
Innovation
−
Learning Curve
Infant Industries : a new industry, which in its early stages experiences relative difficulty or is absolutely incapable in competing with established competitors abroad → offer temporary protection through tariffs
Idea first introduced by Friedrich List, 1841
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TOPIC 8: CONVERGENCE: hypothesis that poorer economies' per capita incomes will tend to grow at faster rates than richer economies. As a result, all economies should eventually converge in terms of per capita income. Developing countries have the potential to grow at a faster rate than developed countries because diminishing returns (in particular, to capital) are not as strong as in capitalrich countries. Furthermore, poorer countries can replicate the production methods, technologies, and institutions of developed countries.
Types of Convergence:
Absolute (Strong) Convergence: lower initial GDP will always lead to a higher average growth rate till the income gap is closed.
Conditional Convergence : a country's income per worker converges to a specific long-run level determined by the structural characteristics of that country (e.g. resource endowments, institutions,…)
Club Convergence : possible to observe different "clubs" or groups of countries with similar growth trajectories . Most importantly, several countries with low national income also have low growth rates.
8.1. Great Divergenece : process by which the Western world (i.e. Western
Europe and the parts of the New World where its people became the dominant populations) overcame pre-modern growth constraints and emerged during the
19th century as the most powerful and wealthy world civilization, eclipsing Medieval India, Qing China, the Islamic World, Joseon Korea, and Tokugawa Japan.
Why was the “West” first to start growing intensively?
Hypotheses: Coal, Market Structure/ Trade, Inventions and Human Capital, Culture, Colonialism, Institutions.
8.2. Data visualization
Logarithmic-scales : useful to visualize data generating processes which exhibit constant growth rates over time. Because functions which grow exponentially with a constant rate become linear if transformed to the log-scale (easy to interpret and to compare.)
How to interpret scatterplots:
1. Normally you plot the variable that you expect to explain something on the horizontal axis (x-axis), the one that is explained on the vertical one (y-axis)
2. Each point explains you how much of the one corresponds to the other-
3. If the dots show a distinguishable pattern, one might talk of a relation between both variables, which can be presented in a trendline or even a mathematical model.
4. If the dots show no pattern, there might be no relation.
5.
You can’t say anything about causality from this; I assume that we want to explain income levels, therefore I advise you to put it on the vertical axis, but the relationship might be the other way around
(“reverse causality”).
8.3. Correlation does NOT mean causation
Measuring Correlation:
−
Measure the strength of a linear relationship between two variables using the correlation coefficient r:
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ECONOMIC HISTORY
− 𝑟 =
∑ (𝑦 𝑖
−𝑦̅)(𝑥 𝑖
−𝑥̅)
√∑ (𝑦 𝑖
−𝑦̅) 2 ∙√∑ (𝑥 𝑖
−𝑥̅) 2
= 𝑐𝑜𝑣(𝑥,𝑦) 𝜎 𝑥 𝜎 𝑦
=
"Same direction" − 𝑣𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛 𝑖𝑛 𝑦 𝑎𝑛𝑑 𝑥
"𝑅𝑎𝑛𝑑𝑜𝑚 𝑣𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛"
=
𝑁 ∑ (𝑦 𝑖 𝑥 𝑖
) −𝑁𝑦̅𝑥̅
√𝑁 ∑ (𝑦 𝑖
) 2 − (∑ 𝑦 𝑖
)
2
∙√𝑁 ∑ (𝑥 𝑖
) 2 − (∑ 𝑥 𝑖
)
2
−
|r| will always be between 0 and 1. If it is zero, there is no linear realtionship between two variables.
If it is equal to 1, y is a linear function of x (or vice versa)
−
The correlation coefficient tells you nothing about the expected impact of changes in x on y.
−
If r=0 this does not mean that there is no relationship at all between two variables.
TOPIC 9: GLOBALIZATION
Globalization : a historical process, the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, particularly through trade and financial flows. The term sometimes also refers to the movement of people (labor) and knowledge (technology) across international borders.
Measures:
−
Availability/Heterogeneity of Products.
−
Trade Relationships.
Free trade adv:
(i)
“Static” gains from international specialization (‘comparative advantage’). Take advantage of specialization
(“Smithian Growth”)
.
Consequences:
−
Price Convergence : degree to which prices for goods and services in European Union Member
States have moved together, or converged, and is an important indicator of the success of the internal market. In contrast, price divergence shows the degree to which prices have moved apart. It is calculated by examining the coefficient of variation of the comparative price levels.
−
Wage Convergence and Migration Waves.
9.1.
Infant Industries : a new industry, which in its early stages experiences relative difficulty or is absolutely incapable in competing with established competitors abroad → offer temporary protection through tariffs.
9.1.1.Policy Responses I: Tariffs
9.2.“Winners” and “Loosers” of Gloablization:
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Product Markets
W: producers of goods where domestic prices are low.
L: producers of goods where domestic prices are high.
Labor market
W: workers in emigration countries/migrants.
L: workers in immigration countries.
9.3.
Political reactions : immigration regulations and quotas.
ECONOMIC HISTORY
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