Exploring Global Economic Growth

Inspired by Ricardo Hausmann’s DEV 130 Course on "Why So Many Countries are Poor, Unequal, and Volatile"

OpenAI, ChatGPT. (2024, September). Used for conversational assistance, providing summaries and enhancing the style of writing.The study of economic history is essential to understanding the forces that have shaped our world today. As part of Ricardo Hausmann’s DEV 130 course on Why So Many Countries are Poor, Unequal, and Volatile, two significant readings--The World Economy: A Millennial Perspective by Angus Maddison and The Economy 1.0 (Unit 1: The Capitalist Revolution)—offer compelling insights into the evolution of global economic growth, inequality, and the dynamics of capitalism. Let's break down the key themes from these texts, which provide a rich understanding of how economies have diverged and converged over centuries.
Global Economic Growth Over a Millennium: 

1. Millennial Growth (1000-1998):
   According to Maddison, from 1000 to 1998, the world witnessed an incredible transformation. The global population expanded 22-fold, while per capita income increased 13-fold. Overall, global GDP grew by a staggering 300 times. However, most of this growth occurred after 1820, when per capita income rose 8.5 times, and population increased by 5.6 times.
2. Economic Divergence:
   By the early 19th century, certain regions—namely Western Europe, North America, Japan, and Australasia—outpaced other parts of the world, leading to a significant income gap. By 1998, the richest regions (such as the United States) had an income disparity of 20:1 compared to the poorest (Africa). However, Asia has shown signs of resurgence and convergence in recent decades, demonstrating that global divergence is not a fixed outcome.
3. Population and Welfare:
   Life expectancy saw a dramatic rise, from 24 years in 1000 to 66 years in 1998. The rapid improvement occurred primarily in countries such as the U.S., Japan, and Europe, where life expectancy reached 78 years by 1998. In contrast, Africa and parts of Asia lagged behind with an average life expectancy of 64 years.
4. Explaining Economic Growth:
   Maddison points to several factors behind economic growth, including the conquest and settlement of new lands (like the Americas), international trade (led by European powers like Venice and Portugal), and technological and institutional innovations. These developments allowed Western Europe to emerge as a dominant economic force.
5. Institutional Impact on Economic Development:
   Institutions played a critical role in the divergence of regional economies. For instance, Maddison argues that Iberian institutions in Latin America were less conducive to capitalist development than those in North America, contributing to the persistent income gap.
6. Post-WWII Economic Boom:
   The period from 1950 to 1973 saw a global economic boom, with GDP growing at nearly 5% annually and global trade increasing by 8% each year. This era of prosperity also witnessed convergence, especially in Europe and Asia, though some regions remained mired in economic stagnation.

The Capitalist Revolution and Modern Growth: 

1. The Impact of Capitalism:
   The capitalist revolution, marked by the rise of private property, markets, and firms, fundamentally reshaped global living standards. Technological advancements and specialization enhanced productivity, but these benefits came at the cost of environmental degradation and growing income inequality.
2. Historical Economic Disparities:
   In the 14th century, economic differences between regions were less striking, though social inequality was severe. Fast forward to today, and economic disparities between nations are vast, as illustrated by the differences in GDP per capita. The modern world is far more unequal, both within and between nations.
3. Rising Income Inequality:
   Income inequality has become a hallmark of modern economies. For example, in Singapore, the wealthiest 10% earn substantially more than the poorest 10%, while in Liberia, income disparities are stark. These inequalities explain the global issue of uneven wealth distribution.
4. GDP and Wellbeing:
   Gross Domestic Product (GDP) per capita is commonly used to measure living standards, but it doesn’t capture other vital aspects of wellbeing, such as environmental quality, social relationships, and leisure time. This limitation challenges the notion that GDP alone reflects true economic progress.
5. "Hockey Stick" Growth and Technological Revolutions:
   The "hockey stick" curve refers to the sharp rise in economic growth experienced by countries like Britain, Japan, and China at different points in history. This growth was fueled by technological advancements and political changes, illustrating how economies can take off at various moments in time.
6. Global Comparisons Using PPP:
   Purchasing Power Parity (PPP) allows economists to compare countries’ living standards by adjusting for differences in prices. For example, Sweden and Indonesia may have vastly different incomes, but when adjusted for PPP, the real difference in purchasing power shrinks, providing a clearer picture of economic wellbeing.
7. The Gains from Specialization:
   Specialization, a key feature of capitalist economies, increases productivity by focusing labor and resources on specific tasks. Adam Smith’s ideas about the division of labor and self-interest remain foundational, as these concepts explain how economies grow and evolve through market-driven processes.

A Century of Divergence and Convergence
While Maddison’s analysis focuses on the long-term millennial view of economic growth and divergence, The Economy 1.0 emphasizes the role of capitalism in shaping modern economies. Both works highlight how economic systems, institutions, and technological progress have led to both the widening and narrowing of global income gaps over time. Although some regions have prospered more than others, there remains hope for convergence, as seen in the resurgence of Asian economies.
These readings offer a valuable framework for understanding how we arrived at today’s global economic landscape and what forces will shape the future.
Conclusion: A New Era of Economic Growth
​The conditions that allowed for rapid economic growth during the Industrial Revolution, the colonial era, and post-World War II are not replicable in today’s world. Environmental degradation, the legacy of colonialism, and the evolving global order present significant challenges. Countries can no longer exploit resources and labor unconditionally, and the need for sustainability has introduced new constraints. Additionally, the global order is far more interconnected and competitive, with multiple power centers vying for influence.
The challenge for modern economies is to find new pathways to growth—ones that prioritize sustainability, equity, and long-term wellbeing over the short-term extraction of wealth. Innovation, technological advancements in green energy, and more inclusive governance models will be critical to creating a future where growth can still occur without the exploitation and environmental destruction that defined earlier centuries.
​These insights help us understand both the historical context of economic growth and the complexities of replicating such success in today’s world. While the era of rapid, unbounded growth may be over, the opportunity for sustainable and equitable progress remains if nations can navigate the challenges of our time.
References
Maddison, A. The World Economy: A Millennial Perspective. OECD Development Centre.
CORE Econ. The Economy 1.0: The Capitalist Revolution. Available at CORE Econ.
OpenAI, ChatGPT. (2024, September). Used for conversational assistance, providing summaries and enhancing the style of writing.