Development Experience of Major Economies of The World

Divergence refers to the economic disparity between different world regions over time: while some (mainly
in Europe & North America) prospered, other regions faced a slump. this is supposed to have begun in the
1800s onwards.
main causes:
1. culture (a. religious; Calvinism (branch of Protestantism) encouraged Europeans to be thrifty, rational &
concerned w/ material gain, b. British practices that led to economic development were imitated (beacon
of progress), c. economic woes ascribed to Greek profligacy & laziness even though OECD shows +
+hard work, d. Nick Clegg, deputy PM Britain ‘alarm clock Britain’, India’s work ethic =/ economy
faltering)
2. colonialism (European plundering & pillage of foreign lands pulled in raw materials, currency & labour,
holding back the rest of the world)
3. scientific advancements (development of open science in 16th century helped w/ the spread of
economically useful ideas)
4. environmental factors (a. Jared Diamond’s theory- Europe uniquely endowed w/ domesticable plants &
animals, disease immune population -> higher productivity & population density -> development of
institutions i.e. cities, bureaucracies & literate classes, b. Gregory Clark - disease killed Britain’s poorer
residents so population become more productive & competent -> self sustaining growth of Industrial
Revolution)
5. property rights - reduced power of the monarchy (Glorious Revolution of Britain in the 1680s; people
less worried about seizure of profits by the crown, more motivated to work hard)
6. capitalism - business friendly, open, & innovative economy

What are the main sources?

1. Cultural
i) Political - a) Colonisation, b) Fall of power of monarchy
ii) Social - a) Rise of Calvinism (Protestantism) accepted the pursuit of wealth
2. Geography
i) Availability of domesticable animals led some regions to grow faster
- mainly 5 (sheep, goats, cows, pigs & horses) out of a total of 14.
- most of these species were not native to Eurasia but could be transported from origins such as the ‘Fertile
Crescent’ (modern day Middle East) to Europe owing to its positioning.
ii) Availability of domesticable plants - again, not native to Eurasia but transported along the W-E axis - led
to agricultural surplus & so the ability to diversify (wheat & rice accounted for 41% of total calories
consumed in the world)
- Both the above advantages were owing to Eurasia’s geographical spread from East to West - Regions
along similar latitudes share similar climatic conditions, terrains, lengths of day etc. making transportation
& the spread of ideas easier
- In contrast, N. & S. America stretched from N to S along similar longitudes; the spread of ideas and tech
was made more difficult.
Germs
- Exposure to domesticable animals also exposed humans to multiple transmissible diseases - smallpox,
measles, chicken pox etc.
- This early exposure led to pandemics that wiped out the ‘weaker’ sections of the population & created
natural immunity & treatments over generations.
- When transported to newly discovered ‘New Worlds’, these diseases aided colonisation by weakening &
wiping out indigenous populations, en masse
3. Colonisation
- The geographical advantages mentioned earlier led to better allocation of human capital, dense population,
mass production, military tech & the search for colonies
- From 1492 & the discovery of the Americas, Europe pulled in raw materials, currency & labour from the
rest of the world - and advanced while holding those regions back.
4. Modernisation
- The reduced power of the monarch, & therefore, property rights & entrepreneurship post the Glorious
Revolution led to the spread of open science (which led to capitalism eventually)

Caveats

I. The geographical hypothesis in particular only seems to be valid till 1500s or 1600s - it fails to explain
why China & India, both locations close to the Fertile Crescent & historically rich became poorer &
were also colonised
II. The cultural reasons (Britain as a ‘shining light’ were disputed by Thomas Sowell, who pointed out that
most of Britain’s wealth in the 19th century was extracted from colonies)
Cultural reasons also often have contradictions. Examples:
a) Greece - supposedly lazy or wasteful, has been shown to be a relatively hardworking population in
comparison to all the other rich countries
b) 'Alarm Clock Britain’ - an idea quite similar to middle classes in other countries etc.

Reference: Why Nations Fail

Differences between Nogales, Sonora & Nogales, Arizona
1. Income - The income of citizens in NS is 1/3rd of those in NA
2. Healthcare - Inferior sanitation & medical facilities in NS compared to NA
3. Economic institutions - Merit-based incentives for business & investment in NA v NS
4. Law & order - Greater sense of safety, maintenance of property rights in NA
5. Education - Most teenagers in school & most adults have a high school degree in NA
6. Public infrastructure - Electricity, sewage systems, road networks & connectivity, community systems
etc. are superior in NA compared to NS
7. Political systems - residents in NA democratically elect their representatives & can replace them if they
misbehave. Politicians are held accountable & provide basic goods & services
8. Path-dependent change - differences in economic & political institutions can lead to long term
differences in standards of living
What are institutions?
- A group of people / a body, which affects the rules of society in some way - for example, (i) economic
institutions (banks, non-bank financial intermediaries, etc.), (ii) political institutions (governments at
various levels - central, state, local etc.).

The expedition into Buenos Aires: Success or Failure?

Largely a failure,
(i) the indigenous population (the Charruas & the Querani) were uncooperative - could not be coerced into
forced labour; did not provide Spanish with food.
(ii) the Spanish could not extract resources from the region & they had expected to find silver but the silver
that was present originated from the Andes.
- Since the Spanish did not find what they were looking for, they eventually abandoned Buenos Aires and
searched for the Incas.

From Cajamarca…

What was the Spanish strategy of the conquest? What could it have been based on?
- Based on literature available on previous conquests - by Herman Cortez of Mexico, for instance - the
Spanish strategy involved identifying the leader of the tribe usually ‘divinely’ appropriated, & subduing
him. By doing so, his followers were more easily subdued as well.
- The next stage was resource extraction i.e. extorting as much gold & silver as possible in order to fulfil
mercantilist objectives to make the expedition profitable. ‘Mercantilism’ - a trading ideology adopted by
European colonial powers that set the goals of (a) achieving a high ‘export’ surplus - i.e. higher surplus of
exports rather than imports & (b) acquiring & accumulating precious metals i.e. gold & silver.

What systems, practices & institutions were established by the Spanish post-conquest?
(i) Establishing a new elite - by marrying into the existing aristocracy by setting up a modified class system
with themselves at the apex
(ii) Encomienda - an institution of tribute & labour services, it granted a group of natives to a Spaniard, who
was given the task of ‘reforming’ them & converting them to Christianity (similar to the Zamindari
system in India), encomendere - the term given to the Spaniard heading the encomienda.
(iii) Reducciones (i.e. reductions) - Towns that facilitated labour exploitation by the Spanish crown (similar
to how concentration camps were held in Nazi Germany and in Post-pearl harbour USA for the Japanese.
(iv) Mita - a system of labour exploitation revived & adapted from an Inca institution - it used forced labour
to run plantations designed to provide food for temples, the aristocracy & the army. - The potosi Mita
was specifically designed to exploit mining purposes & has impacted living standards till the present

 date. - Acomayo, a Mita catchment area, remains poorer, more geographically isolated & dependent on
local food for subsistence, as compared to neighbouring Calca, a non-mita area.
(v) Head Tax - a fixed sum to be paid by each adult male, every year, in silver. - forced people into the
labour market & reduced the wages (reinforcing systems of labour exploitation i.e. the encomienda or
mita).
(vi) Repartimentio de mercancias - coming from the Spanish verb repartir (‘to distribute’), it involved the
forced sale of goods to locals at Spanish determined prices. Similar to idea of a ‘captive market’
(vii)Trajin - Literally means ‘the burden’ - indigenous people were used as pack animals to carry heavy
goods for the business ventures of the Spanish elite. 2 possible reasons: a) Unavailability of indigenous
pack animals, b) dehumanisation of indigenous population (which further reinforced the class system set
up by the Spanish & their position as ‘elite’)
- the full set of systems established by the Spanish were designed to extract wealth, force indigenous living
standards down to subsistence levels & send profits back to the mother country. Land was expropriated,
low wages were paid, high taxes were levied & high prices were charged for goods that were not
voluntarily bought.

To Jamestown…
How was the British colonial experience in N. America different from the Spanish?
- The British attempted the same colonial strategy as the Spanish but were not as successful
(i) The land was not as resource-rich (they were later colonisers). The English Agriculturist Arthur Young
discussed the idea that the value of staple production per capita decreased in proportion
(ii) They were unable to subdue the indigenous populations early & coerce them for food. The population
lacked centralised administrative structure & were suspicious of foreigners.
- The English encountered the Powhatan ribe (a confederacy of 30 tribes owing allegiance to a tribe leader
who was not divinely appointed)
- After attempts to induce forced labour were unsuccessful, trading expeditions were established
- It took the capture of John Smith for the colonists to eventually realise that the Spanish model would not
work for them & that the colonists themselves would have to work
(iii) Population density was lower.

What systems did the British establish in N. America? (Where possible, contrast them with Spanish colonial
systems)
- The early British settlers were initially loyal to the Spanish systems of occupation - and considered gold to
be the most valuable asset in a colony - the colonists mainly comprised of goldsmiths
- They also attempted to crown the Wahunsunacock to establish him as emperor & later ‘tame the head,
tame the herd.’ In retaliation, the tribe imposed a trade embargo on the colony, leading to starvation. John
Smith quickly realised a ‘get rich quick’ method could not work & that ‘something new’ was needed to
survive.
Specifically,
(i) ‘He that will not worke shall not eat’
- This was John Smith’s instruction to the colony - simply, that if they did not work themselves, they would
not survive
(ii) ‘Lawes Divine, Morall & Martial’
- After realising that the indigenous populations could not be easily exploited, the heads of the Virginia
colony attempted to set up an exploitative class system within the colony. It made (i) running away, (ii)
stealing food & (iii) selling any commodities to outsiders illegal.
(iii) The headright system
- Each male settler was given 30 acres of land along with 30 more acres to each family & servant that he
could bring to Virginia. Settlers were also given their own houses & freed from their contracts.
(iv) General Assembly
- Gave all adult men a say in the laws and institutions governing the colony - this was the start of
democracy in the USA
(v) The Charter of Maryland & the ‘fundamental constitution’ of Carolina
- A plan attempting to create a N. American version of an ‘idealised’ rural English society, the charter of
Maryland - followed by FC - drew up a blueprint for an elite, land-based, hierarchical society within the
colony
- Broadly, the social structure —
a) ‘Leet-men’ at the base - to continue across generations who had no political power
b) Lodgueres & Caziques - autocracy
(vi) The First Continental Congress

 - This was a government structure comprising a governor & more property holders (based on franchise in
1774) & followed in all 13 colonies
- They believed they had the right to determine both their membership & the right to taxation.
- Precursor to democracy - but not in a modern sense. Only male property holders could vote - women,
slaves & the propertyless could not.

Briefly comparing the colonies of N. America & S. America -

- in the S. America colonies, the native population was enslaved, while in the N. American colonies - owing
to a less rigid hierarchy amongst the natives, lower population density & greater chances of colony
members running away if oppressed - the colonists eventually had to do the work themselves.
- The N. American colonial institutions ended up having to be relatively more democratically structured as a
result - settlers were granted property & franchise rights
- The Spanish, on the other hand, eventually integrated themselves with the existing aristocracy & rigid
class systems within the indigenous population. The Englishmen, not ending such a rigid class structure,
ended up having to establish partnerships with the native populations.

A Tale of Two constitutions -

- The invasion of Spain by the Napoleon-led French armies led to the abdication of the king, replaced by
the Junta central which finally settled at the port of Cadiz
- The Cadiz constitution was then established - ending special privileges & establishing equality before the
law
a) This was opposed by the Spanish elites, as a result, eventually to the extent of demanding independence
from the Spanish crown, a new junta was established within authoritarian military regimes (sim. In
Mexico)
b) The US, in comparison, adopted & enforced a democratic constitution that created limitations on the use
of political power. While there were some initial differences between northern & southern states, all
white men regardless of property ownership were eventually granted voting rights - though women &
slaves remained disenfranchised (but were counted partially when allocating seats in the House of
Representatives). The civil war eventually ended the practise of slavery.
c) The period of political instability in the US following the civil war last 5 years, Mexico - 50 years
following post-independence - negative impact on property rights, tax revenues, public services, the
existence of monopolies, the exploitation of indigenous populations, the quantity of political & economic
institutions & finally industrialisation & modernisation.

A) Having an idea
- Value of ideas began to be recognised after the Industrial revolution, which saw a massive increase in
productivity owing to the invention of the steam engine & water wheel.
- A patent system was then developed in England in the 17th century to limit the discretion of the monarch
to give ‘letters patents; to whomever he wanted
- Patent system in US was more democratic as a result - majority of patentees had parents who were
professionals or were from land-owning families or were highly educated. This also democratised
innovation & fostered growth.

B) Starting a firm
- Selling patents (if acquired or stolen) - good source of money
- Real use of a patent was to enable the developer to start a business & make money
- Rapid expansion of financial intermediation banking was a crucial facilitator of profit & industrialisation
C) Getting a loan
- In Mexico, politicians set up banking monopolies where finance was provided to close contacts in
exchange for a share of the profits - unsustainable
- The larger number of banks in the US also led to greater competition & lower interest rates & greater
access to finance for businesses
- In Mexico, in contrast after independence, 2 banks controlled 60% of total assets. This led to higher
interest rates & a restriction of credit to the already wealthy.

What is path-dependent change & how has it been manifested in NA & SA?
- ‘Path-dependent change’ refers to the different manner in which USA & Mexico reacted to globalisation &
international trade, based on the institutions set up historically

 - Mexico continued the tradition of its elite based colonial institutions by exporting raw materials to
industrialising N. America or W. Europe. While some colonial institutions preventing international trade
had to be demolished, the model of economic development adopted continues to be one in which the
‘elites’ (typically supporters of the ruling government) made huge fortunes while broader economic
growth did not take place to such an extent. Frontier lands, for instance, were allocated to the politically
powerful, wealthy & well-networked parties, further grew in their wealth
- The allocation of frontier lands in the US, in contrast, took place via a series of land ordinance regulations
- though it still resulted in the dispossession of indigenous peoples - led to a broader, more democratic
allocation of resources & higher economic growth as a result
- While Mexico & Latin America gradually moved towards greater political rights & democracy in the
1990s, the transition was more unstable - mixed with revolutions, expropriations, political instability &
economic stagnation

Making a Billion or Two - compare & contrast how this was done in Mexico v USA.
- Making a billion in USA may be easier for an individual regardless of their background &/or political
networks (Bill Gates) & are also regularly monitored by anti-trust regulators & penalised if required
(Google in EU)
- Entry barriers, red tapes, restricted access to finance based on political connections all made earning a
billion harder (i.e. Carlos Slim made a lot of his fortune via stock market deals & revamping unprofitable
firms post-acquisition)
- In Mexico, legislation like ‘recurso de Amparo’ allows monopolies like Slim’s Telemex to evade anti-trust
legislation by petitioning that laws do not apply to them (originally developed as a safeguard of individual
rights but also creates a loophole in equality before law)
- In the USA, however, Slim’s attempts to monopolise the markets via a breach of agreement by Grupo
Carso w/ CompUSA & its franchise COC services invited an antitrust lawsuit & a penalty.

Toward a Theory of World Inequality

- NA is much richer than NS today due to the fact that completely different institutions on two sides of the
border developed over time, partly bc of colonial experiences. In particular NS in Mexico was colonised
such that ‘extractive’ institutions emerged - which created high levels of inequality & lower economic
growth. In comparison, NA was eventually colonised such that ‘inclusive’ institutions emerged that
created broader economic growth via stable political systems, easier access to finance for
entrepreneurship, patent & property rights protection, competitive business practices etc.
- Thus, USA is far richer than either Mexico or Peru bc of its institutions, both economic & political, which
shape the incentives of businesses, individuals & politicians
- Economic institutions shape economic incentives, the incentive to save & invest, become educated,
innovate & adapt to new tech & so on
- And in turn, the political process determines the political institutions i.e. the power of the state to regulate
& over society - which decides how economic institutions work. i.e. maquiladora enterprises, informal
tech industry

Reference 4
What are vicious v virtuous cycles?
A ‘vicious cycle’ is caused by extractive institutions that create poverty & generate ‘negative feedback loops’
- poor quality institutions (that do not create policies that generate economic growth) lead to poor
productivity & development, low income & higher poverty & therefore poor nutrition & skill development,
& this continues across generations.
In contrast, a virtuous cycle is created by inclusive institutions that facilitated broad access to credit, & in
overall employment generation which then leads to rising incomes, & hence rising investment & increase in
job creation growth & rising incomes over time. (++ examples)

Reference 5
What is Asianization?
- Refers to the ‘epicentre’ (the centre of the world’s wealth) shifting from being (Western) Europe-centric to
being spread across Asia
- Region climbed from low to middle income status within a single generation
- Has an increasingly global share of trade, capital, people, knowledge, transport, culture & resources

 What are the factors behind it?

I. FDI flowing into previously less-known cities in Asia + increased awareness. Home to 21 of the 30
largest & 4 of the 10 most visited
II. Increase in share of global trade, capital & people - dynamic intraregional networks. Around 60% of
Asian countries’ total trade occurs within the the region facilitated by intraregional supply chains (i.e.
production & distribution networks)
III. Integrational funding & investment flows - 70% of Asian startup funding comes from within the region
IV. Flows of people - travel within the region; flows work due to Asia’s diversity
V. Reductions in imports of garbage
VI. Increasing innovation capacity of Asian countries

What are the ‘Four Asias’?

There are four Asias, each at a different stage of economic development, playing a unique role in the region’s
global rise.
1. The First Asia (China) - provides high connectivity & innovation platforms to neighbours via high
outward FDI & patent applications
2. Advanced Asia (South Korea & Japan) - tech & capital; highest total FDI outflow in 2013-2017
3. Emerging Asia - labour & growth potential due to higher productivity & consumption
4. Frontier Asia & India - lowest average share of intraregional flows, set to increase w/ greater integration
w/ Europe & the Middle East, young WF set to capitalise on growing Asian import market & a growing
middle class as a new market for regional exports

The overall differences within Asia are actually complementary to each other. If one nation is at an advantage
in comparison to others, that nation helps in the overall development of Asia by compensating for the others’
disadvantages - i.e. rise in wages & manufacturing costs

Reference 6

What is convergence? What factors seem to have led to it? What are possible obstacles?
- Higher growth (10% or more) in developing economies - higher PCI & living standards & therefore a shift
in the balance of political & economic power
- From 2000 to 2009, developing countries’ growth were 4% higher than developed, raising share of global
output from 1/3 to 1/2
- Developing countries opened to their economies to global markets, refined their laws to be more business
friendly, invested in infrastructure & educated their workforce
- Expansion of supply-chain oriented trade i.e. importing complex counterparts, transforming them into
finished goods for re-export & therefore becoming export powerhouses
- Slowing trade & commodity prices - if growth is highly dependent on external rather than domestic
demand, vulnerable to international shocks