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Lecturas Historia
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1- Introduction and overview
What is economic growth?
- A rise in output over time
- Economic growth is measured through a change in GDP per person (GDP per
capita)
What is GDP? Value of all final goods and services produced by an economy in a
given time (year, quarter, etc.) Limitations of GDP: only markets activities, includes
bads, does not adjust pollution, inequality. It is an underestimated measure for living
standards, misleading→ alternative - Human Development Index- However, in
practice, GDP growth still a decent guide to changes in standards of living.
Why does economic growth matter? Higher living standards?
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- By 1870, Western Europe nearly 4 times East Asian level and Western Offshoots
even further ahead
- By 1950, Western Europe around 7 times better off than East Asia, and the Western
Offshoots nearly 14 times better off
Gap has narrowed considerably since 1978, particularly as China and India began to grow
rapidly
Conclusions:
- Pre industrial growth was very solw (o,25% per year) and often not sustained.
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- Modern economic growth started in 1800, it is much higher (2% per year and
sustained)
- This measures are averaged, does not mean living standars rise for everyone.
- New industries emerged and old ones disappeared.
Article Arguments
- End 19th century in Western Europe was 4 times more developed than Africa, by 200
Western Europe was 10 times richer than Africa, Africa grew at a much slower pace.
This differential economic growth leads to divergence in living standards.
- Also, free time has been increasing over the past 100 years, this means that people
consume more goods and services.
- Structural transformation→ urbanization rates increased in the 19th century.
- Spread of information→ the telegraph was key in the flow of information in the 19th
century.
What explains the stagnation of income per capita over time? → Thomas Robert Malthus -
population increased at exponential rate, while the available amount of food supply only
increases at a linear level, this leads to constant living standards over time.
He made assumptions in his model (Malthusian model): Agriculture is characterized by
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diminishing returns so any temporary gains in income will be reverted by population growth
(increase in income, more food, will increase fertility and decrease mortality, population
expansion pushes incomes back down), no sustained increase in living standards.
Good and bad for economic growth according to Malthus→
Interaction between Malthusian and Smithian growth→ Black death is a big shock in Europe,
It initially caused higher wages which led to higher demand for non-agricultural products,
causing city growth. City growth causes an increase in commercialization and trade, and
thus economic growth.
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societies. Supply of skilled artisans. Geniuses: Roger Bacon, Isaac Newton.
Aplication of scientific methods to day-to-day work, thus causing innovation, thus
economic growth. Facilitated by spread of literacy.
Problem with this argument: in 19th century , the practical application of science to
work was low back then, it was more important in the 2nd revolution.
- Explanation 3: Geography (Bob Allen) - New source of energy: coal. Allowed people
to escape earlier constraints of energy based on wood and muscle power (humans
and animals).
But why did England started using coal first?
Britain was innovating because it was profitable (Allen, 2011) - Coal was cheap and plentiful
and labour was expensive so it made sense to use coal, and save on labour costs.
Conclusions:
● Before the Industrial Revolution, the world was in a Malthusian trap (low or stagnant
growth)
● There was some growth before, but largely caused by trade
● Modern economic growth began with the Industrial Revolution in England
● Institutions, culture, and coal all played an important role
● The Industrial Revolution and spread of economic growth to Europe largely shapes
today’s distribution of income
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revolution”, technology that substituted capital and energy for labor +
Economic History incentivated product innovation to satisfy a larger luxury market
Review, 64, - the supply for technology augmented because of the high
357-384. wages, population could buy more education resulting in higher
rates of literacy which contributed to innovation.
- the supply of technology also affected by the culture of
Newtonian science in Britain
Article suggests that the industrial revolution was mainly a story about
research and development (R&D) (perspiration).
Crafts, N. (2011): Robert Allen (2009a) vs Joel Mokyr (2009) on why Britain was first in
“Explaining the first industrial rev.
Industrial Revolution: Allen: the new technologies were invented in Britain because they were
Two views” profitable there but not elsewhere
Mokyr sees the Enlightenment as highly significant and underestimated
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TFP is key to long-run growth - inventing more technology is unlimited and keeps
contributing to economic growth.
3 sources of economic growth→ by influencing these causes you give incentives to firms to
change the proximate causes of economic growth:
- Institutions: rule of law, corruption (the more regulations and limits the government's
places on something the more likelihood there is for corruption). Institutions are the
rules of the game which impact the behaviour of individuals and organizations, formal
rules such as laws and regulations. Provide incentives to individuals to participate in
certain activities like get education, etc.
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Bad institutions (extractive institutions) are those that use the goods from the whole
for the benefit of a few, these institutions do not promote economic growth as they
are insecure property rights. Ex: dictatorships, limited markets.
Inclusive institutions are designed to benefit the majority of the population, the are
characterized by secure property rights, democracy and free markets.
The french revolution changed institutions: the ancien regime was a system of
corporate privileges, it overthrew the monarchy and was a major social and political
event which led to the rise of secular ideas and individual rights, fostered democratic
progress and the rule of law.
- Culture: Culture are norms of behaviour and informal rules that shapes the
populations behaviour towards work, education, investment and innovation. Shapes
Conclusions
● Economic growth is caused by investment into education and health, new structures
and equipment, and technology and efficiency
● Institutions, geography and culture shape the incentives of individuals to invest into
their education and health, and the incentives of firms to invest into new machines
and technology
● Institutions and culture can be “improved”
● Geography can be improved as well – “elimination” of effective distance to markets
through new technologies (infrastructure, internet)
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- economies of scale because of improvements in factors of
productivity
- reduction of market imperfections (uncertainty and information
costs)
- organizational changes that reduce market imperfectios
Growth will not occur unless existing organization is efficient and
individual have incentives to undertake socially desirable activities (if
private costs > private benefits people will not undertake activity even if
it is socially profitable).
The first globalization period→ Unprecedented growth in trade, migration, and capital flows.
Migration flows large even by present-day standard.
- Trade: only in1980 the world was as globalized in trade as in 1900, there was a trade
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backlash during the interwar period. Now we are more globalized in trade than in the
first globalization period. DIstributional and political consequences.
- Capital, net capital flows as % of global GDP: Only in the 2000s the flows in term of
capital reached the level there was from 1870-1913.
- Labour: now the levels of immigrants as a percentage of the US population are lower
than it was in 1900, so nowadays the world is less globalized in terms of immigration,
this might be due to the restrictions in traveling.
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making cheap grain available→ Impact on food prices, living costs, real wages. Some
parties delighted, others concerned:
- In the case of european labour: 19th Century socialists were pro-free trade , Free
trade led to cheaper bread, Benefited the working classes.
- land owners: Demand protection for the price of their output, land owners have
political importance in many european economies so the Grain Invasion led to
agricultural tariffs in many european countries.
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- Negative impact on labour → Low pressure to maintain full employment when
workers disenfranchised
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Not emigrate→ cost of migrating (transport), opportunity cost of leaving country.
Wage driven migration model→ The poorest countries in the world are not characterized by
emigration, as countries become richer they experience higher emigration (have money to
travel and have better education), the richer the country less incentive to migrate as the
conditions are good to stay.
The macroeconomic consequences of migration
- Wages of local workers goes down or down go up as they would if there was no
inmigration
- Wages of foreign workers goes up
- Stimulates income convergence between countries
Political consequences of migration
Conclusions
● Transport costs fell a lot over the 19th century, tariff barriers fell (not everywhere)
● International and domestic markets integrated; price gaps narrowed
● Mass migration from Europe to the Americas/Australasia
● Wage convergence
● Globalization created substantial winners→ Europeans eat more, better, cheaper
grains and meat + Migrants earn higher wages than at home. But it also created
losers→ Owners of previously scarce resources in both areas: landowners in Europe,
low-skill workers in the US. Did this lead to deglobalization, revolution, or war?
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planted, however, seeds for its own destruction since it created rising
inequality in labor-scarce economies (like the United States) and falling
inequality in labor-abundant economies (like those around the poor Euro- pean
periphery). Interest groups generated a political backlash against immigration
and trade.
Bordo, M. and Interest rates charged on long-term bonds in core capital markets during the
Rockoff, H. era of the classical gold standard differed substantially from country to country,
(1996): “The and these differences were correlated with a country’s long-term commitment
Gold Standard to the gold standard
as the ́good Adhering to the gold standard implied a far more complex set of institutions
housekeeping and economic policies
seal of Countries who adhered (generally):
Deeper causes of WWI: Increasing competition among European powers (imperialism were
searching for markets and competing for them), increasing domestic disaffection (rise of
socialism and nationalism, due to the rise of socialism countries were eager to enter war to
mitigate socialist ideas, demotivate the working classes from the ideas of brotherhood
amongst working classes from different countries), unawareness of modern nature of war.
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Money and finance during wwi→ Suspension of the Gold Standard (countries pay for imports
by liquidating foreign assets) - How do you finance the war? through taxation (increase of
income taxes, however taxation financed less than ⅓ of war expenses), issuing debt to
private agents and money creation (central banks purchase government debt and pay by
issuing banknotes, this led to hyperinflation).
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The 1920s: Hyperinflation
What is it? A very high and accelerating increase in prices, erodes the real value of money-
1922-1924: Dramatic inflation rates in Austria, Hungary and Germany.
Relative prices guide consumer and producer decisions so a change in the price level is
merely a change in the units of measurement, Why is inflation a problem? → Relative price
distortions (causes microeconomic inefficiency in allocation of resources), Increased
uncertainty (complicates financial planning)
One benefits of inflation→ nominal wages are rarely reduced, inflation allows real wages to
fall without nominal wage cuts, so moderate inflation may improve the functioning of labour
What caused the budget deficit in Germany? War debt and reparations
paid by Germany, allies could pay war debts only if they got money
from Germany. UK and France: connect debt with reparations, USA:
do not suffocate German economy. Reparations imposed in treaty of
Versailles (6% of GDP of germany).
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wiped out. Balanced budgets and fiscal discipline→ commitment to economic orthodoxy.
Conclusions
● WW1 led to important monetary and financial disruptions
● Postwar period: hyperinflation in Central Europe
● Hyperinflation caused by budget deficits due to WWI, and resolved by drastic
monetary and fiscal reforms
● Monetary reconstruction in the mid-1920s led to the re-emergence of the
international gold standard
● All of these factors directly impacted the Great Depression, and policy-responses to it
Topic 5: Why did fixed exchange rates in the international economy work better in the period
before 1914 than afterwards?
Eichengreen, B. The imperatives of war finance shattered the prewar fiscal system,
(1996): Golden inaugurating a debate over taxes and public spending that plagued
Fetters: The Gold governments and societies throughout interwar years. International
Standard and the finance was modified with the wholesale liquidation of foreign assets and
Great Depression, accumulation of foreign liabilities. International trade was redirected from
1919-1939 other continents to Europe and not vice versa. Domestic politics were
restructured by the rise of labor, extension of franchise and reform of the
electoral system.
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attractive repository for foreign funds.
The war undermined the basis for these relationships and reinforced New
York’s challenge to London. It transformed the United States from a
debtor to a creditor nation and American banks became serious
competitors internationally in international finance. The creation of the
Federal Reserve System lent new flexibility to the American financial
system.
The disruptions suffered by France or Germany had been greater still
Russia was to withdraw from the international financial community and
the prospects of Paris and Berlin were obscured by the reparation
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questions. The postwar reconstruction would be costly, leading to large
and persistent government budget deficits with uncertain implications.
These uncertainties heightened the importance of credibility for the
operation of the reconstructed gold standard system, when domestic
markets were disturbed, governments could not afford to let investors
doubt that the steps required to defend convertibility would be taken with
dispatch. More than ever, credibility hinged on international collaboration
between governments and banks.
6- The Great Depression (1929-1933): The Real Economy and Monetary Policy
Great depression→ collapse of output, prices, trade, employment. Global average of
production fell by 40% by 1932. Only after 3 year the world’s production started to increase
What caused the great depression→ start of the Great Depression usually associated with
the stock market crash of 1929 - WRONG. The stock market crash gave an impulse to the
start of the great depression, but it cannot explain why it started.
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and decreased their level of consumption, this impulsed the Great Depression as it
initiated a fall of the level of demand
- increased uncertainty, increase in stock market volatility made people uncertain
about the future which lead to postponement of consumption
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the level of demand.
- Protectionism→ at the same time as trade, unemployment, etc was falling the Smoot
Hawley Tariff was introduced, which doubled tariffs and caused retaliation by other
countries and caused a trade war.
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- Net exports→ 1928 net exports declined because of the rapid growth
of imports brought about by the boom conditions and domestic
industry’s inability to satisfy demand + renewed spirit of economic
nationalism
- Government expenditure→ ederal government policy changed from
being countercyclical —whether by accident or design— to
pro-cyclical. This ultimately played a role in converting what was by
then a most severe depression into the Great Depression.
Monetarist explanations for the Great Depression.
1. Milton Friedman and Anna Schwartz: blames the Federal reserve for not
doing enough to ease the liquidity crisis among the nation’s banks. Bank
failures play a pivotal role, failure of one bank had a domino effect, spreading
“contagion of fear”.
2. Followers of Hayek: also blames the FEd, but instead of being blamed for
doing too little, it is criticized for intervienen and thus interrupting the
Eichengreen, B. The gold standard itself was the principal threat to financial stability and
(1996): Golden economic prosperity between the World Wars I and II. The gold standard, I
Fetters: The Gold argue, must be analyzed as a political as well as an economic system. The
stability of the prewar gold standard was attributable to a particular
Standard and the
constellation of political as well as economic forces. Similarly, the instability of
Great the interwar gold standard is explicable in terms of political as well as
Depression, economic changes. Politics enters at two levels. First, domestic political
1919-1939. pressures influence governments' choice of international economic policies.
Oxford University Second, domestic political pressures influence the credibility of governments'
Press. Chapter 1 commitment to policies and hence their economic effects. Credibility and
“Introduction”. cooperation were central to the smooth operation of the classical gold
standard. The scope for both declined abruptly with the intervention of World
War I. The instability of the interwar gold standard was the inevitable result.
Cause GD→ The war greatly strengthened the balance‐of‐ payments position
of the United States and weakened that of other nations. In the mid‐1920s,
the external accounts of other countries remained tenuously balanced
courtesy of long‐term capital outflows from the United States. But if U.S.
lending was interrupted, the underlying weakness of other countries' external
positions suddenly would be revealed. As they lost gold and foreign exchange
reserves, the convertibility of their currencies into gold would be threatened.
Their central banks would be forced to restrict domestic credit, their fiscal
authorities to compress public spending, even if doing so threatened to plunge
their economies into recession. The minor shift in American policy had such
dramatic effects because of the foreign reaction it provoked through its
interaction with existing imbalances in the pattern of international settlements
and with the gold standard constraints.
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Chronology concerning the bank crisis→ the highest amount of bank failures occurred in
1931, 1932 and 1933. The collapse of the Bank of the US created a lot of insecurity.
Financial system
Composed of the institutions in the economy that facilitate the flow of funds from savers
(typically households) to borrowers (typically firms and government). An economy with a
highly developed financial system will be characterized by high investment and high
efficiency. Stimulates formation of human and physical capital and of total factor productivity.
Components of the financial system:
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- Financial markets - Where firms and households directly provide funds to each other
(stock markets, bond markets, etc)
- Financial intermediaries - Where firms and households indirectly provide funds to
each other (banks, insurance companies, etc). financial intermediaries are more
costly than financial markets.
Why do we need intermediaries?
- Problem of asymmetric information, when one party in a transaction has more
information about it then the another - banks help mitigate the problem of asymmetric
information→ Screen borrowers for adverse hidden attributes that savers might not
detect, restrict how loan proceeds are spent by monitoring the borrowers, particularly
important for borrowing by small businesses and households.
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What started as a recession in 1929, turned into a
Great Depression in 1930/1931.
- A vicious circle→ The recession reduces profits,
asset values, and household incomes. This increases
defaults, bankruptcies, and stress on financial
institutions. The financial system’s problems and the
economy’s downturn reinforce each other.
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- Recovery influenced by legislative measures→ Glass-Steagall Act of 1933-
Separation between commercial and investment banking. Federal deposit insurance,
even if bank fails the gov honours the debt. Boosted confidence in the banking
system.
Conclusion
● The recession of 1929/1930 turned into a Great Depression lasting until 1933
because of bank failures and financial crises
● Bank failures are catastrophic for the economy
● The 1931 financial crisis was a global crisis where banking and currency problems
were closely intertwined, magnifying each other
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factor productivity). TFI growth divided between capital, education and other inputs -
Capital most important source of TFI growth. TFP growth divided between catch-up,
foreign trade, structural and other - “other” or unexplained most important source of
TFP growth.
- Capital accumulation
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DEINDUSTRIALISATION
% of world manufacturing exports decline,
In most european countries share of workforce in manufacturing sector declined from 1970.
Manufacturing as proportion of GDP (current prices) has fallen since mid-1950s.
Manufacturing as proportion of GDP (constant prices) has fallen since early 1970s. But total
industrial production is rising, it is just a smaller share.
Is the relative fall of industry a problem?
Possibly causes unemployment
Possibly increases regional inequality - If industry is highly spatially concentrated
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Might harm economic growth - If labor shifts from high productivity industry to low
productivity services (e.g. from factories to restaurants)
Explaining deindustrialization
1. Increase of international competition (e.g. China)
2. Relative price changes -- Prices of manufactured goods have fallen relative to those
of services, largely because of faster technology gains in manufacturing.
3. Engel’s Law→ As income rises, the proportion spent on food declines. In this case,
as income rises, the proportion spent on manufactured goods declines, people tend
to spend more on services as they get richer. Largely implies that deindustrialization
is inevitable as countries get richer.
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barrier) in order to be able to import those goods difficult for them to produce and
concentrate on exploiting their competitive advantages.
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1861 – onset of modernisation:
- Emancipation of servants
- Improvement of banking system
- Foreign Direct Investment arrives
- Government led-industrialisation
Marked imperial russia→ role of state was very important in increasing industrialization -
construction of railways, army…
b. World War I
Very devastating→ west front was in Russia.
People starved, to keep towns happy, the government imposed maximum prices. But:
peasants chose not to sell, leading to hungry towns. Consequence→ The Russian
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- Output targets replaced profits as objective of firms. State decides who gets
resources, investment, what kind of income, and at what prices.
Plans emphasised→ Investment over consumption, factories over housing and
infrastructure, industrial goods over consumer goods, heavy industry over light industry.
Main characteristics of central planning - hierarchical structure of authority
Soft budget constraint, if firms were reaching their trargets, the cost was not that important.
Massive resource mobilization – e.g. collectivization. Rationing of goods and price controls.
Did this system work?
As the economy grew, absolute consumption levels grew too, even though consumption was
sacrificed.
After WW2
Soviet Union – like all economies – recovered well after the war
Economic growth started to slow down in a more dramatic way than western countries. Why
did economic growth decrease?
Unavoidable → Decrease in scope for catch-up. Elimination of surplus labor in agriculture.
Return on investment eventually started declining.
Avoidable→ Soft budget constraint – firms bailed out if bankrupt, causing inefficiency. Price
mechanism highly distorted (von Mises, Hayek) - causing resource misallocation. Poor
incentives to work because of guaranteed employment. Poor incentives to innovate because
of emphasize on output targets (quantity rather than quality of goods). - Actually, labor
efficiency was good, so the issue was capital efficiency, capital efficiency in the soviet union
since the introduction of central planning was dramatically decreasing (soft budget
constraint, investment policy, innovation wee causes to capital inefficiency).
What about inequality under socialism? Inequality under socialism was very low, lower than
france of united states.
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Economic performance in Yugoslavia→ increase in GDP per capita from 1952 to 1980s, but
during 1980s growth decreased. Very rapid growth until the late 1970s, by any benchmark.
Then the country entered a deep crisis during the 1980s (financial crisis, austerity measures,
etc).
Sources of growth
- Total factor productivity
- Capital markets
- Investment policies
- Labour market policies
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Problems already start in 1965 with labor efficiency (”labor wedge”). Largely related to
devolution of power to labor-managed firms in 1965. These firms maximized income per
worker- They were boosting wages above productivity, creating inefficiency, they were
restricting new labor entry, causing unemployment.
TOPIC 9. WAS THE Features of the Socialist System: USSR→ main exponent of socialism in
ECONOMIC the Cold War period. Gur Ofer points out, characterized by the state
FAILURE OF ownership of the means of production and the central planning of production
SOCIALIST and distribution. Objective -develop an autarkical system able catch up
ECONOMIES rapidly with the Wes. Prioritize short-term goals and look for a quick growth
INEVITABLE? without taking sustainability into account→ supposed to be achieved by
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failed to generate growth.
- Investment policy: Allen - 30s and 40s, the policy was adequate
because there was a high surplus in labor, but when unemployment
was eliminated, it required new policies that never took place.
- Investment shifted from the construction of new manufacturing
facilities to the modernization of the old ones, returns of it were very
low because those facilities weren’t as productive as new ones could
have been. Oil fields and mining districts depleted due to the
short-term goals we talked about before, redirected investment to
the extraction of resources in Siberia, which was much more costly.
- Failure to incentivize the provision of labour: Kukic - diminishing TFP
or returns on capital were important, but the main driver of socialist
10. Inequality
Facts:
What happened from the Roman Empire to today?
Inequality has followed cycles since the 7000 bc. Falls in inequality come with major shocks
to the society and economy. Inequality fell after the 1930 and has started to rise again and
reach levels similar to before the great depression since 1980s. Inequality has not grown as
much in southern europe countries as in anglosaxon countries. There are interwar shocks,
after WW1 and WW2. In emerging economies, since the 80s there has been a tremendous
increase in inequality. In russia associated with the transition to capitalism in the 90s, similar
inequality case to the US.
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Measuring inequality
Relative factor incomes:
- Skilled/unskilled labour (skill premium)
- Capital/labour ratio
- Income and wealth shares: top 10% / 1% / .01%
- Gini coefficients
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These measures capture different aspects of inequality and are not necessarily correlated
Inequality data sources:
- Household budget surveys
- Most used methods to calculate income inequality = Tax records (income tax)
- Population and GDP statistics, done when a country is unable to tax their population
(developing countries)
Causes of inequality:
- Skill-biased technical change → Technical change raised the demand for skilled
labour. Skill-biased technology increases inequality by raising wages of skilled
workers more than wages of unskilled (ICT revolution).
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unskilled migration into the United States. Relative supply shifts affect relative wages
(of skilled and unskilled), all else equal.
- Trade→ More exposure to trade affects the demand for domestically produced
goods, will affect demand for labour (skilled or unskilled) as a consequence, hence
their wages. Rise of Asian exporters, offshore services.
- Institutions→ Tax Policy, minimum wages, welfare payments and benefits, unions
and employer organizations, wage setting arrangements.
The Great Compression (1930-1980)
World Wars and Great Depression led to decimation of top capital incomes and decline in
inequality. Wartime concerns with fairness called for heavier taxation of the rich
(=capital-owners), and decrease in inequality → introduction of progressive taxation,
inheritance taxation critical for wealth inequality.
Policies and institutions leading to decline in inequality were direct result of war exigencies -
Global inequality
Has global inequality been increasing or decreasing over time? Global inequality trends:
Nature of global inequality has shifted<
- In 1820, global inequality was mostly caused by within country inequality - ‘class’
inequality.
- Today most inequality is caused
by between country income
differences - ‘location’
inequality. Today what truly
matters in global inequality is
what country you are born into,
the nature of global inequality
has shifted from within country
inequality to between country
inequality. Makes a Marxist
revolution difficult.
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Conclusions
- During the 20th century, inequality has dramatically decreased between 1930-1980,
and rebounded since
- But, there are very important differences between countries. This suggests that
institutions and policy matter a great deal
- Global inequality has levelled off since about 1980, attributed to rise of East Asia
(China)
- Changes in growth and internal inequality in rich societies an important part of this
development
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Topic 10: Does inequality rise with economic growth?
Bourguignon, F. and From 1820 to the eve of WorldWarI, inequal- ity rose almost
Morrisson, C. (2002): continuously. The Gini coeffi- cient went from 0.50 to 0.61, and the Theil
“Inequality among index from 0.52 to 0.79. The increase in in- equality decelerated
World Citizens: somewhat between the wars and slowed even more after 1950. By
1820-1992”, then, however, the world Gini coefficient had reached 0.64, a level of
inequality unknown in most contemporary societies (even today's more
in-egalitarian countries have Gini coefficients less than 0.60). Roughly
speaking, world inequality peaked in the middle of the 20th century after
more than a century of continuous divergence. Changes during the last
50 years look minor compared with that dramatic evolution,and the
Atkinson, A., Piketty, T. Most countries experienced a sharp drop in top income shares in the
and Saez, E. (2011): first half of the twentieth century concentrated around World Wars or
“Top incomes in the Great Depression. In some countries however, those stayed
long-run of history”, outside World War II, the fall is more gradual during the period. 1st
part of the century, top percentile incomes were overwhelmingly
composed of capital income. Top income shares fall because of a
reduction in top wealth concentration. Upper income groups below
the top percentile, comprised primarily of labor income, fall much
less.
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1950, Asian income levels below Africa
Completely changed by 2020
Asian development lead by “Tigers” (superfast economic growth)= Japan, then Singapore,
Malaysia, Hong Kong, Thailand, Taiwan, China, South Korea
GDP per capita growth - Japan- first non western country to experience rapid economic
growth at the start of the 20th century, in the 50s, 60s, 70s Japan started experiencing
supercharged growth.
Other Tigers higher growth than in the west 70s-90s.
Approaches to Development
- Washington Consensus→ 90s, consensus in terms of how the policymaking elites
Pre-conditions matter
Korea and Taiwan - Educational attainment around 1950 suggests “impoverished
sophisticates” with growth potential, similar to Scandinavia in 1870. Low initial inequality.
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employment (enter a firm and stay there for a long period of time). Firms have market
power over employees, but willing to invest in training as a consequence, and get
loyal workforce. In contrast to “Anglo-Saxon” practices.
China→ Story of china - relative income levels have decreased since 1000 to 1978.
Economic growth in China was not negative, but other economies achieved more economic
growth while china did not.
China pre 1949
Living standards were stagnant, China was poorer than India or Africa in 1949.
Income per head was only 5% of American levels.
China 1949-78. After communists came to power the economy started growing.
- Chinese economy grew at 2.3% per annum - given catch-up potential, this is a low
rate of growth. Institutions of china at this time were the same as the soviet union.
- Disaster of ‘Great Leap Forward’, 1958-62 → Enforced agricultural collectivization
and rural industrialization, widespread coercion and terror. Considered a cause of
Great Chinese Famine (est. 18-55m deaths)
- Central planning caused economic growth, in comparison to catch up potential this
was low.
China since 1978
In 1978 China has huge catch-up potential. Since 1978 has grown almost 7% annually (per
capita).
Rapid catch-up growth has led to strong income convergence (close to ⅓ of US income
level), from a low initial starting point.
Achieved through big policy changes.
Sources of growth
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economic growth than other sources of growth.
Explaining Chinese growth
Chinese savings rates among highest in the world → Recycled from state banks to state
enterprises (~10% GDP in 1990) state ensured that after 1978 banks are still state owned
and savings are channeled saving to enterprises which then invest these savings. High
savings are a response to demography, the need to provide for retirement.
Sectoral shift from agriculture to industry - Economies of scale
Openness
Special Economic Zones (SEZ) in Guangdong and Fujian → Special privileges for foreign
companies. Foreign Direct Investment magnets, often overseas Chinese. Labour-intensive
orientation, just as labour costs rise in Asian Tigers.
Foreign asset stocks in chine in comparison to other countries was huge.
State enterprises
Market based economy but state enterprises account for almost 80% of industrial production
in 1978, no market-economy experience.
State enterprises received autonomy without privatization, bank loans instead of state
grants, contract workers instead of lifetime employees.
Today considered Achille's heel of Chinese economy, much less efficient than private owned
enterprises.
The future?
China should continue to grow rapidly in the medium-run: still has rapid catch up potential.
Continued factor reallocation and accumulation (esp. human capital)- farms to factories,
expansion of human capital (better universities) a lot of room for improvement in education
of the general population.
Continued decline of state sector - tension between private sector and state sector.
Faces a challenging demographic change - old population, savings are going to decline (old
population stops saving and starts consuming). Sustained productivity growth is uncertain.
Large state firms remain stubbornly inefficient.State management of economy: encourages
rent-seeking, which winners are being picked? Development hindered by massive
corruption. Are the institutions “wrong” for sustained growth?
Topic 11: Does history suggest that China's fast growth will continue?
Zhu, X. (2012): Argue that China’s rapid growth over the last three decades has been
“Understanding driven by productivity growth. Despite the rapid growth of the last three
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China’s Growth: decades, China’s productivity is still only 13 percent of the U.S. level,
Past, Present, which suggests that China still has plenty of room for productivity growth
and Future“, through further economic reforms.
Journal of Why did China’s growth performance differ so much before and after
Economic 1978? look at the sources of growth
Perspectives, 26, - capital accumulation was the main source of economic growth in
103-124. 1952–197. capital-investment-led growth of the 1952–1978 period
was unsustainable. Increases in both physical and human capital
rather than increases in productive effificiency. Total factor
productivity actually deteriorated during this period.
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- productivity growth has been the main source of growth since then.
Experiences from other economies (East Asian economies) suggest that
periods of extremely rapid growth eventually slow down. China’s per capita
GDP is now around 20 percent of the U.S. level. Many other countries also
heald economic reforms ath the same time as china and did not achieve
such growth - china different because:
- China’s backwardness at the start of economic reform in 1978,
which increased China’s potential for catch-up growth
- China’s economy still has large opportunities for raising productivity
growth through reducing the still-existing distortions and
inefficiencies in its production.
Stiglitz, J. (1996): The East Asian miracle had many dimensions: rents were created, used to
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T12- Stagnation and Failure of the Global Periphery: Africa and Latin America
Growth in Africa
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Africa has seen some growth since pre-industrial era. “Some” growth is much less than
almost anywhere else. No takeoff nations in sub saharan africa with sustained economic
growth. Decline from 1980 to about 2000 in GDP per Capita.
From early 2000s some increase in economic growth.
- Health and life expectancy→ Life expectancy is lower in Africa than elsewhere, but
has increased considerably. No post -1980 reversal, despite shock of HIV/AIDS.
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Understanding Lating American growth:
a. Colonial Institutions→ introduced before 19th century, were in an environment
characterized by high abundance of natural resources (sugar, tobacco...) but very low
labour quantity. In order to ensure production and exportation, european implanrted
extractive insitutions introducinh slavery institutions to ensure cheap labour. This
causes high inequality and low incentives to save and invest.
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Beginnings of reform only visible from mid-1980s
Puzzle: why were ISI policies pursued for so long despite poor performance? → A tool of
redistributing income, rather than creating it. Shield domestic constituencies from global
markets. In time they became a policy of social welfare, people work in bankrupt companies,
but at least people are working.
Conclusions
● Africa suffers from a unique combination of bad geography, bad institutions, and bad
policies
● Since 2000; improvements in institutional environment, spread of democracy,
constraint on executive. But, fragile improvements.
● Latin American growth since 1945 was largely disappointing, mostly a result of
constant flirtation with high protectionism.
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