Economic Development: Theory and Policy

Economic Development: Theory and Policy Andreas Schäfer University of Leipzig Institute of Theoretical Economics WS 12/13 Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 1 / 62

Contents 1. Introduction 2. Nutrition 3. Health 4. Unified Growth Theory and Comparative Development 5. The Role Institutions for Economic Development 6. Why doesn t Capital Flow to the Poor and the Effectiveness of Foreign Aid? 7. Charter Cities Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 2 / 62

Contents - Unified Growth Theory and Comparative Develoment 4.1 Introduction - Unified Growth Theory 4.2 Intorduction - UGT, Trade and Divergence 4.3.1 The Model - Production 4.3.2 The Model - Households 4.3.3 The Model - Equilibrium 4.3.4 The Model - Demographic Transition Optimization 4.3.5 The Model - Comparative Advantage and Trade Effects 4.4 Empirical and Historical Evidence 4.5 Policy Implications Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 3 / 62

4.1.1 Introduction - Unified Growth Literature Oded Galor, 2005, From Stagnation to Growth: Unified Growth Theory, Handbook of Economic Growth, Elsevier. Oded Galor, 2011, Unified Growth Theory, Princeton. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 4 / 62

4.1.1 Introduction - Unified Growth Theory Transition from stagnation to sustained economic growth unprecedented increase in income per capita Change in the distribution of wealth across the globe Variation in the timing of the take-off from stagnation to growth led to a divergence of income across the globe The ratio of income per capita between the richest and the poorest of the world has been increased in 1820: 3/1 in 2000: 18/1 Change in the world distribution of population generated by the decline in population growth in Europe and North America and the delay of the demographic transition in the less developed regions Interaction between the transition from stagnation to growth and the demographic transition Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 5 / 62

4.1.1 Introduction - Unified Growth Theory The evolution of economies over the major portion of human history was marked by Malthusian Stagnation increases in income generated by technological progress and land expansion induced and increase in population growth stagnant income per capita cross-country differences in technologies were reflected in population densities but not in levels of standards of living The increased role of human capital in the second phase of the Industrial Revolution induced the demographic transition, such that the decline in population growth and the associated increase in technological progress and human capital formation paved the way for sustained economic growth. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 6 / 62

4.1.1 Introduction - Unified Growth Theory Unified Growth Theory seeks to capture the transition from stagnation to growth within a single theory and argues that the understanding of the contemporary growth process will be limited unless research sticks to disjoint theories explaining only fragments of the development process of human history Moreover the hurdles faced by less developed countries would remain obscure unless we have a clear understanding about the factors that promoted a transition to sustained economic growth in the developed world Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 7 / 62

4.1.1 Introduction - Unified Growth Theory Main characteristics of of the process of development captured by UGT 1. The epoch Malthusian stagnation 2. The escape from Malthusian stagnation and the increase in population growth and income per capita 3. The emergence of human capital formation 4. The demographic transition 5. The era of sustained economic growth 6. The divergence in income per capita across the globe According to UGT the emergence of multiple growth regimes is due to the existence of variations in the position of countries across the distinct growth regimes (phases of development). Different timing in the take-off is responsible for the Great Divergence Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 8 / 62

4.1.1 Introduction - Unified Growth Theory Unified Growth Theory and the phenomenon of the Great Divergence What accounts for the sudden take-off from stagnation to growth in some countries in the world and the persistent stagnation in others? Why has the positive link between income per capita and population growth reversed its course in some economies but not in others? Why have the differences in per capita incomes across countries increased so markedly in the last two centuries? Has the transition to a state of sustained economic growth in advanced economies adversely affected the process of development in less-developed economies? Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 9 / 62

4.1.1 Introduction - Unified Growth Theory Unified Growth Theory and the phenomenon of the Great Divergence What accounts for the sudden take-off from stagnation to growth in some countries in the world and the persistent stagnation in others? Why has the positive link between income per capita and population growth reversed its course in some economies but not in others? Why have the differences in per capita incomes across countries increased so markedly in the last two centuries? Has the transition to a state of sustained economic growth in advanced economies adversely affected the process of development in less-developed economies? Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 10 / 62

4.1.2 Historical Evidence Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 11 / 62

4.1.2 Historical Evidence - Fertility, Mortality and Life Expectancy Ambiguous relationship between fertility and mortality during the Malthusian epoch Increasing incomes per capita induced declining mortality rates and increasing fertility rates Increased mortality increased fertility rates such that the number of surviving offspring was maintained constant and compatible to the amount of available resources. Early urbanization (1540-1740) induced a drop in life expectancies at birth. A decline in mortality along with an increase in life expectancy started in England around 1740 Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 12 / 62

4.1.2 Historical Evidence - Fertility, Mortality and Life Expectancy Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 13 / 62

4.1.2 Historical Evidence - Fertility, Mortality and Life Expectancy Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 14 / 62

4.1.2 Historical Evidence - Differential Timing of Take-off Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 15 / 62

4.1.2 Historical Evidence - Output and Population Growth Malthusian regime: positive link between income and fertility such that income per capita remained constant Post-Malthusian regime: positive link between income and fertility but increasing income per capita Modern Growth regime: negative link between population growth and income per capita Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 16 / 62

4.1.2 Historical Evidence - Output and Population Growth Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 17 / 62

4.1.2 Historical Evidence Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 18 / 62

4.1.2 Historical Evidence - Demographic Transition Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 19 / 62

4.1.2 Historical Evidence - Demographic Transition Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 20 / 62

4.1.2 Historical Evidence - Demographic Transition Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 21 / 62

4.1.2 Historical Evidence - Industrialization and Human Capital Formation Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 22 / 62

4.1.2 Historical Evidence - The Great Divergence Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 23 / 62

4.1.2 Historical Evidence - Shift in World Population Shares Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 24 / 62

4.1.2 Historical Evidence - Industrialization Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 25 / 62

4.1.3 The Theory Lit.: Oded Galor and David N. Weil, Population Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and beyond.american Economic Review, Sep. 2000, Vol. 90(4), pp. 806-828. Oded Galor, From Stagnation to Growth: Unified Growth Theory. Handbook of Economic Growth, 2005, North-Holland. capture the process of development over the entire course of human history. That is, capturing the epoch of Malthusian stagnation that characterized most of human history, the contemporary era of modern growth and the forces that triggered the transition between the two regimes. What is the justification for the selective use of observations which characterize only the contemporary growth process? Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 26 / 62

4.1.3 The Theory The Malthusian model has two key components: 1 Fixed factor of production (land) implying decreasing returns to scale for all other factors. 2 Positive effect of the standard of living on the growth rate of population. Malthus: when population size is small, the standard of living is high, and population will grow as a natural result of passion between sexes. When population size is high, the standard of living is low. Population will be reduced by preventive checks or positive checks (disease, malnutrition, etc.). Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 27 / 62

4.1.3 The Theory Implications of the Malthusian model: In the absence of technological progress or in the availability of land the size of population will be self-equilibrating, increases in available resources will be offset by the size of population, countries with superior technologies will have denser populations, but a similar standard of living (China). These predictions are consistent with the evolution of of technology, population, and output per capita for most of human history. Maddison (1982): growth rate of per-capita GDP between 500 and 1500 was zero. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 28 / 62

4.1.3 The Theory The Post-Malthusian Regime: The Malthusian mechanism linking higher income to higher population growth is still at work, but the diluting effect on resources per capita was counteracted by technological progress. In western Europe population growth was 40 percent as large as total output growth between 1820-1870, and only 20 percent as large between 1929-1990. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 29 / 62

4.1.3 The Theory The Modern Growth Regime: is characterized by steady growth in both income per capita and the level of technology. there is a negative relationship between the level of output and the growth rate of population. In England live births per 1,000 women aged 15-44 fell from 153.6 in 1871-1880 to 109.0 in 1901-1910 (Wrigley, 1969). The reversal of the Malthusian relationship corresponded to an increase in the resources invested in each child. The average number of years of schooling in England and Wales rose from 2.3 for a cohort born between 1801-1805 to 9.1 for the cohort born between 1897-1906. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 30 / 62

4.1.3 The Theory Implications: Key event that separates the Malthusian and Post-Malthusian Regimes is the acceleration in the pace of technological progress. Event that separates the Post-Malthusian and the Modern Growth Regime is the demographic transition that followed the industrial revolution. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 31 / 62

4.2.1 Introduction - UGT, Trade & Divergence Oded Galor and Andrew Mountford, 2008, Trading Population for Productivity: Theory and Evidence, Review of Economic Studies Vol. 75, pp. 1143-1179. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 32 / 62

4.2.1 Introduction- UGT, Trade & Divergence Fundamental research question: Has the transition from stagnation to sustained economic growth in advanced economies adversely affected the same process of transition in less-developed countries? If this is/was the case what was the economic channel responsible for the delay in the take-off from stagnation to growth? Channels that have been seen responsible for the Great Divergence 1. geographical and institutional factors 2. human capital formation 3. ethnic, linguistic and religious fractionalization 4. colonialism 5. globalization Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 33 / 62

4.2.1 Introduction- UGT, Trade & Divergence The argument brought forward here: trade played a significant role in the timing of the demographic transition across countries and has been a major determinant for the distribution of population and income per capita across the globe. Reasoning: Trade effects industrialized and non-industrialized countries asymmetrically 1. Industrialized countries: gains from trade have been channeled to education and output per capita growth 2. Less-developed countries: gains from trade have been channeled to population growth More precisely: Expansion in trade induces a specialization in the production of skilled intensive goods in industrialized countries and in non-industrialized countries in the production of unskilled intensive, i.e. non-industrial, goods. Demand for (un-)/skilled labor in (non-)/industrialized countries increases Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 34 / 62

4.2.2 Introduction - Kuznets facts Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 35 / 62

4.2.2 Introduction - Kuznets facts Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 36 / 62

4.2.2 Introduction - Kuznets facts Share of Share of total employment total consumption expenditure Agriculture declines declines Manufacturing stable stable Services increases increases Remark: this reflects the last hundred years. Prior to this period there has been a rise in manufacturing (see Laitner (2000)). Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 37 / 62

4.2.2 Introduction (acceleration) in structural change and the demographic transition in industrialized countries that stimulates technological progress non significant demand for skilled labor in non-industrialized countries and therefore no incentives to invest in child quality. non-industrialized countries become increasingly unskilled labor abundant and industrialized countries increasingly skilled-labor abundant. The interaction between technology and population sharpens the pattern of comparative advantages between industrialized and non-industrialized economies. international trade affected the distribution of population, skills and technologies and has been a significant force behind the Great Divergence Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 38 / 62

4.3.1 The Model - Production The economy produces a manufactured good Y m and an agricultural good Y a. Production in each sector takes place with either an old or a new technology. In early stages of economic development only the old technology is viable. New technologies become viable due to faster productivity growth of this technology during the process of development. The agricultural sector: The industrial sector: Y a,o t = a a t (L a,o t ) γ 1 γ X }{{} =1, (1) Y a,n t = A a t L a,n t (2) Y m,o t = a m t (L m,o t ), (3) Y m,n t = A m t F (Ht m, L m,n t ) = A m t f(h m t )L m,n t. (4) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 39 / 62

4.3.1 The Model - Production Inverse demand for unskilled labor in the agricultural sector { wt u p = t a a t (L a,o t ) γ 1 if Y a,o t > 0 p t A a t if Y a,n t > 0 (5) Inverse demand for unskilled labor in the industrial sector { wt u a = m t if Y m,o t > 0 A m t [f(h m t ) h m t f (h m t )] = A m t w u (h m t ) if Y a,n t > 0 w s t = A m t f (h m t ), if Y a,n t > 0. (6) The wage ratio is determined by ω(h m t ) = ws t w u t = f (h m t ) f(h m t ) hm t f (h m t ), if Y a,n t > 0. (7) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 40 / 62

4.3.1 The Model - Production The relative price of the agricultural good in terms of the manufactured good (p m t 1!): a m t a,o, if Y a a t (La,O t ) γ 1 t > 0 and Y m,o t > 0 a m t A p t = t, if Y a,n t > 0 and Y m,o t > 0 A m t wu t a,o, if Y γ 1 t > 0 and Y m,n t > 0 a a t (La,O t ) A m t wu t A a t, if Y a,n t > 0 and Y m,n t > 0 (8) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 41 / 62

4.3.2 The Model - Households A member i of generation t born in t 1 solves { max {c i,a t subject to,c i,m t,n i,u t,n i,s t } p t c i,a t (c i,a t + c i,m t ) α (c i,m t ) β [wt+1n s i,s t + w t+1 n i,u t ] 1 α β} (9) + wt(n i i,s t τ s + n i,u t τ u ) wt, i (10) c i,a t c (11) Obviously, the optimization problem takes account for subsistence needs in terms of nutrition, in the sense that the level of consumption of the agricultural good is at least c. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 42 / 62

4.3.2 The Model - Households Consumption of the agricultural good c i,a t = { c if α w i t p t α wi t p t if α wi t p t < c c (12) Consumption of the manufactured good c i,m t = { β 1 α (wi t p t c) if α wi t p t βw i t if α wi t p t < c c (13) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 43 / 62

4.3.2 The Model - Households Time devoted to child rearing n i,s t τ s + n i,u t τ u = 1 α β 1 α w i t pt c w i t if α wi t p t 1 α β if α wi t p t < c c (14) Fertility choices n i,u t = 0 if n i,u t, n i,s t > 0 if n i,s t = 0 if wt+1 s wt+1 u wt+1 s wt+1 u wt+1 s wt+1 u τ s τ u = τ s τ u < τ s τ u (15) in the new industrial sector exists a unique skilled-unskilled labor ratio (h m ), in the sense that ws t wt u = ω((h m ) ) = τ s τ, with n i,u u t = 0, if h m t < (h m ) and n i,s t = 0, if h m t > (h m ). Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 44 / 62

4.3.3 The Model - Equilibrium Given that both sectors are subject to the old technology Employment in the agricultural sector L a,o t = [ c α a N t ] 1/γ if α wi t t p t αn t if α wi t p t Employment in the manufacturing sector L m,o t = Time devoted to child rearing N t i=1 j=u,s τ j n i,j t = < c c β 1 α (N t [ c α a N t ] 1/γ ) if α wi t t p t βn t if α wi t p t < c c 1 α β 1 α (N t [ c α a N t ] 1/γ ) if α wi t t p t (1 α β)n t if α wi t p t < c c (16) (17) (18) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 45 / 62

4.3.3 The Model - Equilibrium Technological progress depends positively on the skill intensity of the workforce g t+1 = λ t+1 λ t λ t = g(h t = H m t /N t ), (19) where g (h t ) > 0 and g (h t ) < 0 and the productivity level of a general purpose technology (GPT) is represented by λ t. The productivity levels in each sector depend positively of the GPT-level A j t = Aj (λ t ) a j t = aj (λ t ) j = a, m (20) where Aj (λ t) λ t > 0 and aj (λ t) λ t > 0. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 46 / 62

4.3.3 The Model - Equilibrium Productivities are restricted such that technological progress is consistent with observed historical patterns. Productivity improvements in the industrial sector are larger than in the agricultural sectors and new technologies advance faster than old ones A m (λ t ) > Aa (λ t ) > am (λ t ) > aa (λ t ) A j (λ t ) > 0, lim λ t λ t λ t λ t λ t a j (λ t ) =. The new industrial technology becomes viable at t = (t m ) > 0 and the new agricultural sector t = (t a ) > 0such that A m t a m t A a t a a t 1 w u ((h m ) ) t (tm ) (21) ((L a,o t ) ) γ 1 t (t a ) (22) Neither of the new technologies is viable at t = 0 and the new agricultural becomes viable before the new industrial technology (t a ) < (t m ) (23) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 47 / 62

4.3.3 The Model - Equilibrium The skilled-labor intensity becomes positive when the new industrial technology is implemented and equals h from t = t on, where t t implies c i,a t c 0 if t < (t m ) h t+1 = h([1 + g(h t )]λ t ) if (t m ) t t (24) h if t t Number of offspring of an individual i = u, s at t < t n i t = (1 α β)(1 pt c wt i (1 α)(τ u + lu (λ t+1 ) l s (λ t+1 ) )[1 + lu (λ t+1 ) l s (λ t+1 ) h(λ t+1 ) h(λ t+1 ) 1 h(λ t+1 ) ] 1 h(λ t+1 ) τ s ) Whenever t t such that h = h, the number of offspring is constant (1 α β)(1 + h ñ = τ u + 1 h ) (25) h τ (26) s 1 h Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 48 / 62

4.3.4 The Model - Demographic Transition 1. t < (t a ) : Malthusian regime and subsistence restriction is binding. Technological progress rises real wages and population growth which erodes the positive effect on income per capita. 2. (t a ) < t < (t m ) : Income per capita and population start to grow. 3. (t m ) < t < t: The increase in the demand for skilled labor reduces the population growth rate. 4. t t: Subsistence consumption is no restriction anymore. Technological progress does not affect the expenditure shares anymore, such that share of skilled households is constant and equals h and the rate of population growth is constant as well. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 49 / 62

4.3.5 The Model - Comparative Advantage and Trade Effects Consider two identical (except for their productivity levels) countries A and B, with [A m t ] A > [A m t ] B and [A a t ] A > [A a t ] B such that { A m t } A { A m > t } B, (27) A a t A a t where (t m ) < t < t. In autarky p A t = [Am t ]A w u ((h m ) ) [A a t ]A p B t = [Am t ]B w u ((h m ) ) [A a t ]B pa t p B t (28) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 50 / 62

4.3.5 The Model - Comparative Advantage and Trade Effects The world equilibrium relative price of the agricultural good p t is in between the autarkic equilibrium prices p B t p t p A t. (29) In A: the relative price of the agricultural good shrinks, such that the industrial sector expands In B: the relative price of the agricultural good increases, such that the agricultural sector expands Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 51 / 62

4.3.5 The Model - Comparative Advantage and Trade Effects Given p B t p t p A t, the ratio of skilled-workers increase in A, such that the rate of population growth shrinks. If p t < p A t, A specializes completely on manufactures. Given p B t p t p A t, the ratio of skilled-workers declines in B, such that the rate of population growth increases. If p t > p B t, B specializes completely on agricultures. Since the evolution of technological progress depends positively on the skill intensity of the workforce, trade opening between A and B increases the technological gap between the economies compared to autarky. International trade therefore reinforces the initial patterns of comparative advantage. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 52 / 62

4.4 Empirical and Historical Evidence Cross-country regressions Hypothesis: In non-industrial economies, international trade induces via a declining demand for human capital an increase in fertility and a decline in fertility accompanied by a rise in human capital formation in industrialized countries. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 53 / 62

4.4 Empirical and Historical Evidence Total fertility rate (TFR), 1985-1990 Non-OECD OECD OLS OLS IV IV OLS OLS IV IV (1) (2) (3) (4) (5) (6) (7) (8) ln (Trade/GDP) 0.21 0.33 0.69 0.70 0.12 0.04 0.23 0.13 1985 (0.17) (0.14) (0.26) (0.19) (0.10) (0.09) (0.09) (0.06) ln (GDP/pc) 1.66 0.39 1.79 0.44 0.53 0.14 0.53 0.10 1985 (0.14) (0.27) (0.15) (0.25) (0.35) (0.23) (0.32) (0.23) av. inf. mort 0.03 0.03 0.03 0.03 1985-90 (0.005) (0.005) (0.005) (0.005) Obs 108 108 108 108 24 24 24 24 R 2 0.58 0.72 0.55 0.71 0.29 0.62 0.27 0.60 (i) (3),(4),(7) and (8) employ the Frankel-Romer IV for log in trade share in GDP in 1985, (ii) (iii) Robust standard errors in parentheses ***: significance at the 1% level; **: significance at the 5% level; *: significance at the 10% level Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 54 / 62

4.4 Empirical and Historical Evidence Change in the Average Years of Education, 1985-1990 Non-OECD OECD OLS IV OLS IV (1) (2) (3) (4) ln(trade/gdp) 0.10 0.27 0.26 0.35 1985 (0.08) (0.12) (0.19) (0.20) ln(gdp/pc) 0.15 0.20 0.26 0.25 1985 (0.06) (0.07) (0.25) (0.22) Obs 74 74 23 23 R 2 0.05 0.01 0.08 0.08 (i) (3),(4),(7) and (8) employ the Frankel-Romer IV for log in trade share in GDP in 1985, (ii) Robust standard errors in parentheses (iii) ***: significance at the 1% level; **: significance at the 5% level; *: significance at the 10% level Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 55 / 62

4.4 Empirical and Historical Evidence During the 19th century, North-South trade, as well as North-North trade expanded due to industrialization in Northwest Europe (as well as to a reduction in trade barriers and transportation costs). Ratio of world trade to output: 2% in 1800; 10% in 1870; 17% in 1900; 21% in 1913 Proportion of foreign trade to national income: UK: 10% in 1780; 26% in 1837-45; 51% in 1900-13 before WW 1: 54% in France; 38% in Germany; 34% in Italy Growth in exports increased the pace in industrialization Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 56 / 62

4.4 Empirical and Historical Evidence Non-industrialized countries were an important market for manufactures. Trade with Asia accounted for over 20% of UK total exports during the 19th century. International trade played for India the reverse role. 1813-1850: rapid expansion in international trade where India transformed from an exporter of manufactures (textiles) to a supplier of primary commodities. UK supplied over 2/3 of imports to India and constituted a market for 1/3 of India s exports Rapid industrialization in the UK was associated with a decline in the per capita level of industrialization in India. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 57 / 62

4.4 Empirical and Historical Evidence Per Capita Industrialization Levels 1800 1860 1913 1953 1980 UK 16 64 115 210 325 Europe 8 17 54 90 267 India 6 3 2 5 16 Index is normalized to 100 for the UK in 1900 India in its boundaries in 1913 Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 58 / 62

4.4 Empirical and Historical Evidence Source: Galor (2005) Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 59 / 62

4.5 Policy Implications The theory presented so far suggests the industrialized and non-industrialized regions benefited differently from the gains of trade. If non-industrialized countries channel their gains from trade in population growth protection from free trade seems to be a reasonable answer. This argument deserves some deeper considerations. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 60 / 62

4.5 Policy Implications Early theoretical studies on the growth-openness link argued that trade interventions can increase growth and welfare (infant industry argument). Redding, S. (1999), Oxford Economic Papers 51: specialization with respect to static comparative advantages these sectors however may not be characterized by potential in productivity growth given that a government can select the right sectors: selective protection may result in faster technological change Even this argument should not be confounded with a long-run strategy of protection in order to generate development. Protection is always - if at all - a short term strategy to prepare a market economy for international competition. Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 61 / 62

4.5 Policy Implications Early empirical literature captured only the decades after 1970 and found a positive link between growth an openness of a country (f.e. Barro and Sala-i-Martin 1995). Resent studies have been more skeptical about this finding: Vamvakdis (J. of Ec. Growth, 2002) uses data from 1870 on and finds support for a positive sign before 1970. He finds a negative correlation for the inter war period 1920-1940. The positive correlation seems to be a recent phenomenon. Clemens and Wiliamson (j. of Ec. Growth, 2004) find evidence for a negative relationship for the period 1870-1913. Both theoretical and empirical evidence point into the direction that gains from openness depend on the trade regime of the world economy, i.e. high protectionism in the world, reduces the benefits from opening the home economy. Recent decades have been characterized by massive trade liberalization such that the gains from openness have increased. How does this relate to UGT? Andreas Schäfer (University of Leipzig) Unified Growth Theory WS 11/12 62 / 62