ISLAMABAD: Stable institutions with consistent policies have played a key role in the economic development of the global economies as the institutions collectively contribute to creating a framework that supports economic development and ensures political accountability in a country.

This was the crux of a webinar titled, “How the World Became Rich”, a book jointly written by Mark Koyama and Jared Rubin organised by the Pakistan Institute of Development Economics (PIDE), here on Tuesday.

While delivering the keynote lecture, Jared Rubin, professor of economics at Chapman University said that over the centuries the institutions remained important for economic prosperity and political stability.

He said that in terms of economic institutions, secure and flexible property rights, along with free entry into markets and the ability to establish and leave businesses, are essential.

On the political front, institutions such as political rights, constraints on executive power, democracy, a free media, and an independent judiciary are important for fostering a conducive environment for growth and stability, he elaborated while explaining his research work on the subject.

The author made a strong case for the interaction of demographics and culture, geography and colonialism, in shaping the institutions that determine differential national economic development. Any reader interested in understanding the reasons behind the graphs above will gain enormous insight by investing time in reading this book.

Answering the question why are some parts of the world rich, and other parts poor, he said that in the West majority of the people are living in conditions almost unimaginably more comfortable than billions of people in regions where economic growth and development have been slower.

This “great divergence” is even more intriguing given how relatively recent it is: 500 years ago the West was no richer than the Far East, while 1,000 years ago, the Islamic world was more developed than Christian. He said at that time Europe in everything from mathematics to philosophy, engineering to technology, agriculture to medicine was lagging behind the Muslim world. The medieval German nun and writer Hrotsvitha called Islamic Córdoba “the ornament of the world”.

The book has rejected the notion that religion played any negative role in the development and economic prosperity of any region. The book also talks about the reasons why most humans are significantly richer than their ancestors. Humanity gained nearly all of its wealth in the last two centuries. How did this come to pass? How did the world become rich?

According to Rubin, economic growth occurs when there is a sustained increase in economic prosperity, which we can measure by the total number of goods and services produced in the economy. The world today is a direct result of the economic growth that began in Britain in the 19th century, quickly spread to parts of Europe and North America, and has continued unabated since. It has since raised living standards in East Asia, Eastern Europe, and parts of Latin America. There is real hope to believe this will continue into South Asia, the Middle East, and sub-Saharan Africa in our lifetime.

Answering the question why did not growth happen before the 19th century; What were the preconditions that Britain had that allowed it to take off first; Why did some countries follow Britain’s lead and others did not; What can this history tell us about how wealth can spread to the rest of the world in the 21st century, Rubin said that one reason is institutional as groups like labour unions played a key role in redistributing income more broadly and another reason is demographic.

During Britain’s early period of industrialisation, its population grew rapidly enough to keep wages down. It was only as places went through a “demographic transition” (the movement from large families and high birth and death rates to smaller families with lower birth and death rates) that productivity gains began to be translated into major increases in real wages.

The third reason is education as many of the innovations of the first Industrial Revolution were not science-based and thus did not require a highly skilled workforce. Beginning in the middle of the 19th century, science became more important, and a better-educated workforce was desired. States began spending more on education, leading to a better-educated workforce. Higher education typically leads to greater income.

None of these causes explain why income became more broadly distributed by themselves; it was a combination of these factors that mattered.

Moreover, technological developments also played an important role in turning the world richer, because of a massive increase in the rate of technological innovation. Rubin said he thinks one thing the history of technology has taught us is that as long as the incentives are there for innovators to innovate, we will continue to be surprised. The most important new innovations are often impossible to foresee.

Today, AI offers the possibility of such surprises (with major moral caveats). Three decades ago, it was the internet. There have been many such transformations in the last two centuries due to inventions such as the telegraph, locomotive, automobile, telephone, electrification, steam engine, and much more.

Prior to about two centuries ago, most children lived in a world that was technologically similar to the ones their parents inhabited as children. This has not been true for a little over two centuries, at least in the most technologically advanced nations.

My children live in a world of very different technology than I did as a child, as did I relative to my parents. I see little reason why this will not be the case over the ensuing generations.

Answering another question why some countries grew rich while others have not, he said that that economic growth occurred only after the rate of technological innovation became highly sustained. Without sustained technological innovation, any one-off economic improvement will not lead to sustained growth.

Incomes will rise in the short run, but over time people will have more babies and those babies will eat up the entire economic surplus. This is known as the “Malthusian trap,” after Thomas Malthus, a British clergyman of the late 18th century. This Malthusian logic explains the pre-industrial world pretty well.

Although there were ebbs and flows in pre-industrial economic growth, no society ever broke through and achieved sustained economic growth. This happened only after the overall rate of technological progress became high enough to more than offset the downward pressure imposed by population growth, Rubin said.

He argued that sustained innovation also requires cultural values that support innovation and encourage understanding of how the world works. Societies in which work is looked down upon are unlikely to experience sustained innovation.

Most societies in world history had none of these features, let alone all of them. It took a while for all of these preconditions to coalesce in one nation. But once it did, economic growth took off.

Copyright Business Recorder, 2024