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income 2,000 years ago was remarkably equal: almost everyone,
everywhere was very poor. The ¬gures he has reported tell us
furthermore that average world income and the regional
distribution of income per head were pretty much the same in CE
1000 as they had been 1,000 years earlier. It would appear that
regional disparities became signi¬cant only from the beginning of
the 19th century: income per head in Western Europe had by then
become three times that in Africa. But world income per head was
still only $755 a year in today™s prices, meaning that it had increased
by less than 50% over a 1,800-year period; amounting to an annual
growth rate of under 0.02%. The ¬gure is extremely low by
contemporary standards: the annual growth rate of income per
head has been about 2% a year over the past four decades. (A useful
formula to remember is that, if a numerical entity “ say real GDP
per person “ grows (or declines) at the annual rate of g%, that entity
doubles (or halves) approximately every 70/g years. Examples: GDP
per capita would double every 35 years if it were to grow at an

16
annual rate of 2%; and halve every 140 years if it declined at an
annual rate of 0.5%.)

Large regional disparities in income are also less than 200 years
old. The ratio of the average incomes in the US and Africa has risen
from 3 at the beginning of the 19th century to more than 20 today “
about $38,000 compared to $1,850 per year. Real GDP per capita
in the US has grown 30 times in size in 200 years, implying that the
average annual growth rate of income per person there has been
about 1.7%. In sad contrast, income per capita in Ethiopia is about
the same today as it was 200 year ago (a little over $700 a year
today), a fact that is re¬‚ected in the differences we noted between
the incomes per member in Becky™s and Desta™s households,
respectively.




Macroeconomic history
If you were to line up countries according to GDP per capita today,
you would ¬nd two clusters: one poor (Desta™s world), the other rich
(Becky™s world). There are middle-income nations spread thinly
between the extremes (China, Brazil, Venezuela, and Argentina are
prominent examples), but a large cluster of countries (in sub-
Saharan Africa, the Indian subcontinent, South East Asia,
Melanesia, and Central America) “ with a total population of 2.3
billion “ produces an average $2,100 a year per head, while another,
smaller, cluster (Europe, North America, Australia, and Japan) “
with a total population of a little under 1 billion “ enjoys an average
annual income of $30,000 (Table 1). The world would appear to be
polarized. Moreover, with the possible exception of India, there is
little sign that the poor world will catch up with the rich world in
the foreseeable future. During the past four decades, real per capita
GDP has grown at an average annual rate of 2.4% in rich countries,
whereas it has grown at 1.8% in poor countries (Table 1). Worse,
within the poor world, sub-Saharan Africa has experienced a small
decline in real GDP per capita during the past four decades.

In contrast to poor countries, agricultural output is a small fraction
of national income in the rich world. The share of agriculture in

17
GDP is about 25% in the poor world; less than 5% in rich countries.
Less than 10% of the population in rich countries live in rural areas.
In contrast, more than 70% of people in poor countries live in
villages (Table 1); which gives rise to the thought that people in poor
countries mostly work in economies that draw their production
inputs directly from Nature “ they are ˜biomass-based™ economies.
Ecology is of direct concern to the world™s poor, in a way it isn™t to
the world™s rich.

Recently, the United Nations Development Programme (UNDP)
has sought to extend the basis on which the standard of living is
measured. It has done so by constructing a numerical index that
combines GDP per capita, life expectancy at birth, and literacy.
UNDP has christened it the Human Development Index (HDI).
Again, leaving aside a few exceptions, HDI has been found to be low
in poor countries, high in rich countries (Table 1).
Economics




Proximate causes behind differences between
Becky™s and Desta™s worlds
What enables people in Becky™s world to be so much richer than
people in Desta™s world? Several features suggest themselves.

People in rich countries have better equipment to work with
(electric drills are more powerful than pickaxes; tractors are
superior to ploughs; and modern medicine is vastly more effective
than traditional cures). So, one argument goes that the
accumulation of physical capital (more accurately, manufactured
capital) in Becky™s world has been a signi¬cant contributor to the
high standard of living people enjoy there. This could be the factor
X that I mentioned in the Prologue to illustrate the way economic
theory and applied economics mesh today.

Others have noted that people in rich countries are far better
educated, implying that they are able to make use of ideas to
produce goods that are out of reach for people in countries where

18
large numbers are illiterate. A crude index of education is the
proportion of adults (people aged 15 and above) who are literate,
the ¬gure for which today is over 95% in the rich world, but only
58% in the poor world (Table 1). Gender inequalities are
considerably greater in the poor than in the rich world. The
proportion of adult women who are literate in poor countries is
48%, whereas in the rich world the corresponding proportion is
pretty much the same as that for men, namely, over 95% (Table 1).


Table 1. Rich and poor nations




Macroeconomic history




19
Allied to education is health. Life expectancy at birth in rich
countries is now 78 years, whereas it is about 58 years in poor
countries. Some 120 children among every 1,000 of those under 5
years of age die each year in the poor world; the corresponding
¬gure for rich countries is 7 (Table 1).

Relatedly, clean water and good hygiene have reduced morbidity in
rich countries greatly. About one-quarter of the population in the
poor world suffer from undernourishment, whereas the
corresponding ¬gure in rich countries is negligible. As
undernutrition and vulnerability to infections reinforce each other,
poor nourishment and morbidity go together. There is evidence
that undernourishment in early childhood affects the development
of cognitive faculties. Taken together, the average person in the rich
world is capable of supplying work of far higher quality and for
many more years than his counterpart in a poor country. Education
and health go by the name human capital. A literature pioneered
Economics




by the economists Theodore Schultz and Gary Becker reveals that
the accumulation of human capital has been a signi¬cant factor
behind the high standard of living people in Becky™s world enjoy
today. This could be the factor Y that was mentioned in the
Prologue.

Many economists, however, regard the production of new ideas as
the prime factor behind economic progress. They say that rich
countries have become rich because people there have been
successful in producing ideas not only for new products (printing
press, steam engine, electricity, chemical products, the electronic
computer), but also for cheaper ways of producing old products
(transportation, mining). Of course, education and advances in
science and technology combine as an economic force. Primary
and secondary education alone can™t take a society that far today.
A country where tertiary education is low would not have a
population capable of working with the most advanced
technology. Nor are scienti¬c and technological advances
capable of being achieved today by people with no advanced

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education. Ideas could be the factor Z that was mentioned in the
Prologue.

Related to this is an issue that has proved to be far more contentious
than it should have been: population growth. Even unaided
intuition suggests that if numbers grow quickly, the rate at which
capital assets must increase would need to be high in order to
maintain living standards. If the desire to accumulate physical and
human capital is the same in two countries, and if rising numbers
don™t reduce the cost of accumulating that capital, the country
where population grows at a slower rate can be expected to enjoy a
higher living standard in the long run. Since the mid-1960s,
population in what is today the poor world has grown at an average
annual rate of about 2.4%, while the corresponding ¬gure in today™s
rich world has been about 0.8% (Table 1). This is a big difference.




Macroeconomic history
Statistical demographers now agree that, controlling for other
factors, countries where population increase has been large in
recent decades have experienced slow growth in real GDP per
capita. Later in this book we will note that high population growth
in today™s poor countries has also put enormous pressure on their
ecology, creating further problems for rural people.

A country™s population growth is affected not just by net
reproduction, but by net immigration and the age distribution too.
In order to isolate net reproduction, it is common practice to work
with the fertility rate (more accurately, the total fertility rate or
TFR), which is the number of live births a woman expects to deliver
over her life. Suppose parents desire to have a certain number of
surviving children. Then the fertility rate should decline once the
mortality rate among children under 5 starts to decline.
Demographers have puzzled why reductions in fertility rates in
today™s poor world have been slower than they had expected. The
¬rst known decline in fertility rates in northwestern Europe
(England and France especially) occurred in the 17th century, when
the rate fell from about 7 to 4 (Chapter 6). The fertility rate in the
rich world today is 1.8 (below 2.1, the ¬gure at which population

21
would stabilize in the long run), whereas it is 3.7 in the poor world
(Table 1). Despite a signi¬cant decline in child mortality rates, the
TFR in a number of countries in sub-Saharan Africa continues to
be between 6 and 8. We should ask whether there have been
countervailing forces at work to keep fertility rates high in that
continent. We should ask too whether the resulting population
growth has been a factor in its terrible economic performance over
the past four decades. We will study the question in greater detail in
Chapter 6, but one implication of high fertility rates for women™s
conditions follows at once.

In sub-Saharan Africa, extended breastfeeding has been a
traditional practice for controlling pregnancies. Among the !Kung
San nomads of the Kalahari Desert, children have been known to be
breastfed until they are 4 years old. Even if we were to ignore such
extreme cases, successful reproduction in Africa would involve two
years of pregnancy and breastfeeding. This means that in societies
Economics




where female life expectancy at birth is greater than 45 years and
the fertility rate is 8, girls can expect to spend more than half their
fecund life (say, 15“45) in pregnancy or nursing; and we have not
allowed for unsuccessful pregnancies. Under these circumstances,
women such as Desta™s mother are unable ever to seek employment
outside subsistence agriculture.

No economist has ever claimed that there is a single driving force
behind economic growth. All would appear to agree that the
accumulation of manufactured capital, human capital, and the
production, diffusion, and use of new scienti¬c and technological
ideas go together, each contributing positively to the contributions
of the others. In the contemporary world, an accumulation of, say,
manufactured capital goods raises real GDP, other things being
equal. This enables societies to set aside more of their incomes for
education and health, triggering a reduction in both fertility and
child mortality. Education increases GDP further, other things
being equal, while reduced fertility and child mortality typically
lower population growth; which, taken together, enable societies to

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set aside more of their incomes for the production of new ideas.
This raises the productivity of manufactured capital; which in turn
brings forth further accumulation of manufactured capital; and so
on, in a virtuous cycle of prosperity. The ¬‚ip side of this is, of course,
a vicious cycle of poverty. The polarization that separates the rich
and poor worlds today is a manifestation of those two movements.
Economists use the terms virtuous and vicious cycles to
characterize polarization (a few of us refer to vicious cycles as
poverty traps); mathematicians say instead that the poor and rich
worlds are in two different basins of attraction.

It is possible to discover the relative importance of the various
factors responsible for economic growth. No doubt the answer is
different in different places and in different periods of history; but
¬ve decades ago, Robert Solow showed us how to investigate the




Macroeconomic history
question, by devising a way to decompose recorded changes in an
economy™s real GDP into their measurable sources. In contrast to
the empirical exercise on cross country statistics that I described in
the Prologue, the idea here is to measure changes in X, Y, Z over a
period of time in a given country and estimate the relative
importance of those changes for growth in real GDP there over that
same period. Suppose that over an interval of time a country™s real
GDP has increased. Solow, and subsequently others, showed how to
attribute that growth to increases in labour force participation
(population growth; increases in women™s employment in paid
labour), the accumulation of human skills and manufactured
capital, improvements in the quality of machinery and equipment,
and so on. Now suppose that when we have added up all the
contributions made by these factors of production, we ¬nd that the
sum falls short of real GDP growth. We are entitled then to
interpret that shortfall as an increase in the overall productivity of
the economy™s capital assets; by which we mean that more output
can be produced now than earlier, even if the amounts of such
factors of production as machines and equipment and skills had
remained the same. This is a formal way of acknowledging that
there has been a general rise in the ef¬ciency with which goods are

23
produced. Economists call that rise growth in total factor
productivity.

How does that latter growth come about? It comes about when
people acquire knowledge and make use of it, or when people make
better use of what they already know. Which is why economists
often refer to growth in total factor productivity as technological
progress. But there are other changes in an economy that could
leave an imprint on total factor productivity, such as improvements
in the workings of institutions. Growth in total factor productivity
may be an ungainly way to convey an idea, but it re¬‚ects the
unexplained bit of real GDP growth pretty well. In the economics
literature the name has come to stay.

Since the Second World War, growth in total factor productivity in
the rich world has been considerable. It has been estimated, for
example, that during 1970“2000 the average annual rate of growth
Economics




of total factor productivity in the United Kingdom (UK) was 0.7%.
Economists have estimated that, in contrast, total factor
productivity declined slightly in a number of countries in sub-
Saharan Africa during that same period.

What do these ¬gures mean? Take the case of the UK. The country™s
real GDP grew at an average annual rate of 2.4%, which means
about 29% of that growth (that is, 0.7/2.4) could be attributed to
increases in total factor productivity. At 2.4% growth rate, real GDP
in year 2000 was twice the real GDP in 1970. Nearly one-third of
that increase can be attributed to growth in total factor productivity.
In contrast, the economies in sub-Saharan Africa where total factor
productivity declined during that period became less ef¬cient in
their use of such factors of production as machines and equipment,
skills and labour hours. It™s hard to believe that people in those
countries systematically forgot technical knowledge they had
known in the past. So the decline in total factor productivity there
must have been due to a deterioration in local institutions,
precipitated by civil wars and bad governance.

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These statistics raise a puzzle. Today™s poor countries lie mainly in
the tropics, whereas the rich countries are mostly in temperate
zones. No doubt the tropics are a breeding ground for many
diseases, but they also harbour vast quantities of natural resources
(timber; minerals; and conditions suitable for the production of
spices, ¬bres, coffee, and tea). During the past several centuries, the
countries that are rich today have been importing those very
resources and products to fuel their factories and mills, and to make
their meals enjoyable. They accumulated machines, human capital,
and also produced scienti¬c and technological knowledge. Why
didn™t the poor world take advantage of their resource endowments
to enrich themselves in the same way?

Colonization is a possible answer. Historians have shown that, from
the 16th century, European powers have extracted natural resources




Macroeconomic history
from the colonies “ including cheap (read, slave) labour “ but have
mostly invested the proceeds domestically. Of course, one should
ask why it is that the Europeans managed to colonize the tropics;
why colonization didn™t take place the other way round. As noted
earlier, Jared Diamond has offered an answer. That said, many of
the most prominent of those ex-colonies have been politically
independent for decades now. During that time real income per
head in the rich world has increased over and over again. With the
exception of a few striking examples in South and South East Asia,
though, most of the ex-colonies have either remained poor or
become poorer still. Why?


Institutions
Economic historians such as Robert Fogel, David Landes, and
Douglass North have argued that the rich world is rich today
because, over the centuries, it has devised institutions that have
enabled people to improve their material conditions of life. This
is a deeper explanation. It says that people in rich countries work
with superior technologies, are healthier, live longer, are better
educated, and produce many more productive ideas, because they

25
have been able to get on with their lives in societies whose
institutions permit “ even encourage “ the economy-wide
accumulation of such factors of production as machines,
transport facilities, health, skills, ideas, and the fruits of those
ideas. The accumulation of productive capital assets is only a
proximate cause of prosperity, the real cause is progressive
institutions.

One can peel away the conceptual onion some more, and ask how
and why past people in today™s rich countries were able to fashion
their institutions in ways that enabled those proximate causes of
prosperity to explode there. One can even ask whether institutions
did it, or whether it was the enlightened policies of the rulers that
were responsible for the explosion. But then, policies aren™t plucked
from air, they emerge from consultations and deliberations within
institutions. Nor is it likely that a policy designed to bring
prosperity to a country will actually work unless the institutions
Economics

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