Evaluate the following claim: “history shows us that war has been more
important than trade in pushing along development.”
There is no doubt that both war and trade have been fundamental in shaping every nation,
and whilst there are clear benefits of trade and obvious harms of war, there have as well been
detrimental effects of trade and unexpected returns to war. I will start by discussing the
importance of war with respect to the economic advancement of society, but will then
comment on the negative effects. Following this I will visit the importance of trade, looking
closely at the great divergence. Finally I will discuss the difficulty in deciding the factor of
greatest importance when faced with different countries with varying histories. I will conclude
that trade is more fundamental to growth than war, however war is able to shape future
patterns of trade.
The first benefit of war I shall detail is the potential for the unfortunate high magnitude of
loss to provide an exogenous shock to the labour market in such a way that enables workers
enough bargaining power to leave behind the iron law of wages, and exit the Malthusian trap.
This high magnitude of loss however, does not come from direct casualties of war,
Voigtländer and Voth (2013, pp. 781-2) argue that these casualties had little effect on
aggregate death rates; the disease spread by military forces, in fact, had a considerably more
substantial impact on aggregate death rates. One historical example they use to justify this:
is the case of 6000 French soldiers that were dispatched to assert French dominance over a
region in northern Italy, in the process the French soldiers inadvertently spread plague that
may have killed up to 1 million people. At the same time, less than a quarter of the wars
happening in Western Europe were happening in East Asia, in addition to Asian cities being
cleaner, healthier and less susceptible to the mass deaths caused by plague. Large shocks in
the land - labour ratio were consequentially a reality that the West suffered more than the
East, this suffering and resulting shift to Solow growth seems to have been positive in the long
run in pushing along development.
One further benefit of war is its impact on state capacity. The British government first
introduced income tax in 1798 in order to help fund the Napoleonic Wars, and this was not
the only case of an introduction of income tax in direct response to a conflict. The IRS was
founded during the US Civil War, and both of these state revenue mechanisms were
significantly strengthened during both World Wars (Besley & Persson, 2009). The reason for
this, presented by Besley and Persson, is that war/defence is the archetypal common interest
public good. Therefore, state capacity increases with the demand for public goods. The
empirical specification in this paper shows the growth rate as directly proportional to the
investments in legal capacity (Besley & Persson, 2009, p. 1234), and this is further confirmed
by the historical data presented in figure 1 (p. 1220). The paper copes well with endogeneity
concerns, identifying one particularly relevant concern in the concluding comments, that: a
‘sense of belonging’ creates a common interest and that this is often explicitly fostered
through public programs.
Whist their specification allows the growth rate to be proportional to investments to legal
capacity; a causal link has not yet been established. ‘Warfare, Fiscal Capacity, and
Performance’ (Dincecco & Prado, 2012) builds on the previous paper to demonstrate that
fiscal capacity has a positive (causal) impact on per capita GDP. The paper uses the IV of
‘casualties in premodern war’ as a proxy for ‘current fiscal institutions’ utilising the previous
papers findings. Subsequently the paper establishes the strong positive statistically significant
effect of fiscal capacity on worker productivity (pp. 197-8); whilst they do not isolate the exact
mechanism responsible for this positive consequence, they do make a compelling case for the
benefits of a strong government (that gained strength through war).
One incredibly important example of conflict acting as a critical juncture for economic growth
is described by historian Kenneth Pomeranz (2000, pp. 60-6) as occurring in China between
1100 and 1400 and being primarily the result of the Mongol invasions and occupations of
China. This instability caused the Chinese population and therefore industry to move into
Southern China. This caused lasting damage to Chinese economic growth as the coal reserves,
that were at the cutting edge of mining technology at the time, became vastly distant to the
industry that they were supporting. A very different picture occurred in the naturally
efficiently located British industrial cities of the 19th Century on the doorstep of cheap coal
deposits. Pomeranz had also argued that Iron mining had failed to recover, however this has
been since refuted. A noteworthy issue with much of this book is that as a historian, much of
the argument is grounded in narrative and lacks a convincing model; however, accurate data
for this time period would likely not exist and the narrative is fairly compelling and enjoys
some verification from (limited) historical data.
Greif, Milgrom, & Weingast (1994) propose that trade had been absolutely fundamental to
the creation of the institutions required for economic growth, they focus in particular on the
creation of merchant guilds in the late medieval period. Historically many states were
predatory, therefore merchant guilds were established to keep rulers from expropriating
foreign traders. This in fact benefitted the rulers, because this allowed trade to prosper and
in some cases, the rulers even encouraged the emergence of these guilds as 'commitment
devices'. Due to the difficulty in measuring enforcement using econometric techniques, Greif,
Milgrom, & Weingast used a game theoretic technique to prove that these guilds were
established for the mutual benefit of traders and rulers. They go on to explain that these
guilds established more secure property rights and that their prescence facilitated an
increased volume of trade. These institutions were certainly instrumental in pusing forward
development.
A further point to support the supreme relevance of trade when comparing the engines of
economic growth is given by Acemoglu, Johnson, & Robinson (2005); in the paper they
examine why trade benefitted some nations much more than others. Whist Atlantic trade
predominantly benefitted countries with non-absolutist initial political institutions, it is clear
that Atlantic trade was incredibly significant in pushing along development in almost all
panels, with particularly high levels of statistical significance in some (pp. 555-6). This paper
solves the omitted variable concern very well by using Atlantic coastal to land area ratio as an
IV for Atlantic trade; the paper also reduces the risk of using unreliable data by using both the
Maddison constructed historical GDP data, and urbanisation data. The paper presents a
compelling case on the importance of trade for development, especially when parallels are
drawn with countries less prepared for international trade.
One final example of trade promoting growth comes from exactly the same argument and
paper as the first example of the unexpected benefits of war; the paper by Voigtländer and
Voth (2013) argues that trade was an incredibly effective method of transmitting disease
across national borders. This was however only effective in countries with already high levels
of urban living, and the contagion promoting living environments that thrived in Western
Europe (pp. 783-5). Voigtländer and Voth provide a compelling argument on the benefits of
both trade and war, in how they provide shocks that move countries onto a Solow-Swan
exogenous growth model.
It is difficult to decide the factor of greatest importance when faced with different countries
with varying histories. The arguments are quite compelling in both cases, it would perhaps be
quite intuitive to conclude that war is of the least importance for development; however, I
have to conclude that war has had the ability to change the course of history by a magnitude
that trade is unable to. The arguments for critical junctures created by trade have relied on a
greater level of preconditions and assumptions than those supporting war. I found that Besley
and Persson’s paper complemented by the work of Dincecco & Prado showed a very clear
effect of war on growth; the necessity to fund the public good is unquestionable and this
creates a robust chain of argument. Despite the lack of econometric techniques I found
Kenneth Pomeranz’s informed narative on the Great Divergence incredibly persuasive; the
economic history literature has a tendency to create convenient models and regressions to
suit prior conclusions, so I didn’t find the lack of these in this work particularly harrowing.
Bibliography
Acemoglu, D., Johnson, S., & Robinson, J. (2005). The Rise of Europe: Atlantic Trade,
Institutional Change, and Economic Growth. The American Economic Review, 95(3),
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Besley, T., & Persson, T. (2009). The Origins of State Capacity: Property Rights, Taxation, and
Politics. American Economic Review, 99(4), 1218–44.
Dincecco, M., & Prado, M. (2012). Warfare, Fiscal Capacity, and Performance. Journal of
Economic Growth, 17(3), 171-203.
Greif, A., Milgrom, P., & Weingast, B. R. (1994). Coordination, Commitment, and
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