Varying growth trajectories of the west and the south: the role of inequality and institutions.

Author:Popov, Vladimir

27 August 2014

Modern economic growth started in the West, not because of the efficiency of various capitalist institutions (elimination of serfdom, free cities, universities). It was the redistribution of wealth and income (enclosure in Britain) that resulted in an increase in savings and investment, allowing for an acceleration of productivity growth. It was not an abundance of competition or entrepreneurship, or ideas for technological innovations that allowed the West to accelerate productivity growth. Instead, it was first and foremost the abundance of savings and investment that resulted from growing income inequalities that allowed an increase in the capital/labour ratio, and cast in iron the ideas for new products and technologies. To put it differently, the West became rich not due to its inventiveness and entrepreneurial spirit, but due to the merciless dismantling of peasant community that previously provided social guarantees to the poorest.

In some developing countries (Latin America and Russia, for example) that replicated the Western route, economic growth also accelerated from the sixteenth century onwards, however not as much as in the West so they were still falling behind. In other parts of the developing world (East and South Asia, as well as the Middle East and North Africa) economic growth did not really start until the mid-twentieth century. But when it did finally begin these countries quickly caught up with the first group and continued to bridge the gap with the West (Figure 1). Why the difference?

The second group of countries--East and South Asia, and the Middle East and North Africa--were less affected by colonialism and managed to retain their traditional community (collectivist) institutions that prevented the rise in income and wealth inequalities. This delayed the take-off point until the mid-twentieth century, but permitted them to preserve low inequality and strong institutions--a beneficial starting position for future economic growth.

There is evidence that these two groups of developing countries are very different in terms of income inequalities and the capacity of state institutions as measured by objective indicators--for example, homicide rates (violation of the state monopoly on violence), and the shadow economy. To take a closer look at the two trajectories of catch-up development among the non-Western countries, I examine in greater detail the differences in institutional and economic development...

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