Industrialization and the World It Created
To understand how the world became rich, we need to understand how parts of the rest of the world beyond Europe and its offshoots obtained the fruits of the modern economy. In the 20th century, a much larger portion of the world became rich, led by East Asia. This progress has continued into the 21st century, led by China's rise. In the next few decades, there is reason to believe that hundreds of millions will be lifted out of poverty in South and Southeast Asia, Latin America, and sub-Saharan Africa. How did these incredible achievements come to be? Why should we expect them to continue to spread to the poorest parts of the world?
As recently as 1960, most of Asia was extremely poor – though no poorer than most civilizations have been in world history (see the figure at the top of the page). After all, the condition for nearly every human being living before 1800 was poverty or near-poverty. This changed over the course of the 20th century, and it continues to change in the present. Asia is becoming richer, and as such the world is becoming richer. This chapter is dedicated to how this happened.
One important reason that some countries have taken so long to catch up is the shadow cast by colonization. It is highly unlikely, as we discussed in Chapter 6, that colonization explains why the colonized world did not industrialize first. However, in many parts of the world, colonization undoubtedly played a role in delayed convergence. Many parts of the formerly colonized world that were subject to extractive institutions still languished behind the world’s leading economies. This includes much of sub-Saharan Africa, South Asia, and parts of Latin America. In some of these countries, the extractive institutions put in place by colonizers remained after independence. But the institutions put in place by colonial rulers were not the only relevant factor. Prior conditions mattered. Policy choices also mattered. We review some examples of how these various features interacted in this chapter.
Consider India: at the height of its prosperity around 1600, per capita incomes were around 60% of British per capita incomes. During the 17th and 18th centuries, however, the Indian economy declined. Many factors were responsible for this decline including worsening climatic conditions, invasions, and endemic warfare. The subsequent conquest by the British East India Company brought further dislocation. Attempts to institute a system of property rights had the unintended consequence of creating a class of absentee landlords. Credit markets remained undeveloped. And the economy remained Malthusian. Upon independence in 1947, opportunities for economic growth in India were thus circumscribed for the very reasons we discuss in the first half of the book
The Indian government began to deregulate in the 1990s. Only after this happened did India turn a corner. As of 2015, 731 million people in the world were living in extreme poverty (less than $1.90/day). Of these, 216 million live in South Asia (another 413 million live in sub-Saharan Africa). The trends are encouraging, though (see the figure below). The liberalizing reforms brought economic growth to India.
The first non-Western country to achieve sustained economic growth was Japan. We discuss at length how this happened in this chapter. We ask: What enabled Japan to successfully pursue a policy of industrialization and state-building? What institutional and cultural features played a role in Japan's rise?
We proceed to discuss how the "East Asian Tigers" (Hong Kong, Singapore, South Korea, and Taiwan) became rich. It was not obvious as recently as the 1970s that these countries would have sustained growth. For instance, the figure below compares the economies of the East Asian Tigers to those of Latin America and sub-Saharan Africa. Although the Tigers had similar levels of income to sub-Saharan Africa in the 1960s and lower per capita income than Latin America, by 2019 per capita incomes in Latin America and the Caribbean were only 28.6% of those in South Korea, Singapore, and Hong Kong ($10,826 vs. $37,841).
Why did the East Asian Tigers become rich? Like Japan, these countries did not need to reinvent the wheel. But catch-up growth is not simply a matter of importing technology. Institutions matter. So does culture. So do geography, demography, and a society’s colonial past. We discuss why and how these factors mattered for the East Asian Tigers in this chapter.
We then turn to the biggest case of recent economic growth: China. We first discuss one of the enduring puzzles in the history of economic growth – why did China not industrialize first? During the height of the Song dynasty (960–1279), China was much richer than even the wealthiest parts of Europe. Yet by 1850, Chinese per capita GDP was one-fifth that of England. We discuss what the first half of this book can tell us about China's rapid growth over the last four decades (see the figure below). After decades of mismanagement, famine, and persecution by Communist rule produced mass impoverishment, the growth of the last four decades has lifted around one billion Chinese citizens out of dire poverty. We discuss at length why and how this happened, what was unique about Chinese growth, and what we can learn from China's economic ascent.
In many respects, the developments overviewed in this chapter have contributed more to the world becoming rich than anything that happened in Britain or the US. The countries that became rich first hold a relatively small share of the world’s population. For the world to become rich, it was necessary for those riches to spread to more populated places. First and foremost this meant Asia, which holds around 60% of the world’s population. Sure, there is a long way to go. And sure, the path is even more fraught in sub-Saharan Africa, parts of Latin America, and parts of Central and South Asia. But this is real, tangible progress. The world is becoming richer.