The Wealth and Poverty of Nations: What have we learned since Adam Smith Will Masters Department of

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The Wealth and Poverty of Nations  What have
we learned since Adam Smith? Will
MastersDepartment of Agricultural
EconomicsPurdue Universitywww.agecon.purdue.edu/
staff/mastersICEE Econ CampBrookston,
INOctober 16th, 2007
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The year 1776 produced some great new ideas

• In the United States,
• modern democracy

and in Scotland, modern economics!
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What have we learned since then about the wealth
and poverty of nations?

• We have a lot more
• experience, observation and data
• including the U.S. experience!
• testing of possible explanations
• do they make sense? (economic theory)
• do they fit the data? (econometrics)
• How well has Adam Smiths book held up?
• look at his ideas in just three key areas
• the influence of agriculture and geographic
  location
• the proper role of government
• the link between wealth and population growth

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Adam Smith on the role of agriculture and
geographic location

• Agricultural success leverages industrial growth
• The most opulent nations, indeed, generally
  excel all their neighbours in agriculture as well
  as in manufactures but they are commonly more
  distinguished by their superiority in the
  latter. (Book 1, Ch. 1)
• Low-cost transport facilitates growth by
  specialization
• As by means of water-carriage a more extensive
  market is opened to every sort of industry than
  what land-carriage alone can afford it, so it is
  upon the sea-coast, and along the banks of
  navigable rivers, that industry of every kind
  naturally begins to subdivide and improve itself,
  and it is frequently not till a long time after
  that those improvements extend themselves to the
  inland parts of the country. (Book 1, Ch. 3)

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Adam Smith on the role of government

• Good government is limited but active
• The sovereign has only three duties to attend
  to
• first, the duty of protecting the society from
  violence and invasion of other independent
  societies
• secondly, the duty of protecting, as far as
  possible, every member of the society from the
  injustice or oppression of every other member of
  it and,
• thirdly, the duty of erecting and maintaining
  certain public works and certain public
  institutions which it can never be for the
  interest of any individual, or small number of
  individuals, to erect and maintain, because the
  profit could never repay the expense to any
  individual or small number of individuals, though
  it may frequently do much more than repay it to a
  great society. (Book 4, ch. 9)

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Adam Smith on the role of population growth

• Income growth encourages population growth, which
  in turn promotes more income growth
• High wages encourage population (and) what
  encourages the progress of population
  encourages real wealth. (Book IV, Ch. 7)

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What do the data show about these three
mechanisms?

• We have lots of evidence about each of them
• Geographic location and agriculture
• Government policies and governance
• Population growth and demography
• I will focus on results from my own research, and
  what might be most useful for you

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Since 1776, the wealth of nations has grown
rapidly in some countries
USA
Estimated real income per capita,
1400-1998 (regions with above-average income)
Japan
W.Eur.
Other west
World ave.
1776
E.Eur.
Fmr.USSR
Source Calculated from data in Angus Maddison
(2001), The World Economy A Millenial
Perspective. Paris OECD.
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and why do the poor lag so far behind?
Lat.Am.
Estimated real income per capita,
1400-1998 (regions with average income or below)
World ave.
Oth.Asia
China
India
Africa
Source Calculated from data in Angus Maddison
(2001), The World Economy A Millenial
Perspective. Paris OECD.
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Idea 1 Geographic location still matters!only
the tropics are still poor
Source J.D. Sachs, 2001. Tropical
Underdevelopment. NBER Working Paper 8119.
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although coastal location can help some tropical
countries catch up
Income per person, 1995 (with sub-national data
for 19 countries)
Source Sachs, JD, Tropical Underdevelopment.
NBER Working Paper 8119. Cambridge, MA NBER.
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Coastal location helps explain the success of
tropical Asia, especially East Asia
Real income per capita, 1975-2003
World average
East Asia (developing)
Until 1990s, Asia was significantly poorer than
Africa
US dollars at PPP prices of 2000
S.Asia
Sub-Sah. Africa
Source World Bank, World Development Indicators
2005.
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Idea 2 Quality of government matters
Successful governance is both cause and
consequence of per-capita income
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But what explains the extreme tragedy of poverty
and disease in Africa?
Life expectancy at birth, 1950-2000
Source Computed from UN Population Division,
2004 lthttp//esa.un.org/unppgt
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The contrast between S. Asia and Africa is
greatest in agriculture
FAO index value, 1961100
Source calculated from FAO data, at
http//apps.fao.org.
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Asias agricultural successes have been
mainly in food production
Source calculated from FAO data, at
http//apps.fao.org.
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Food production matters undernutrition remains
the worlds 1 cause of ill-health
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Explaining Africas lag brings us to what Adam
Smith did not know
such as the power of RD to transform agriculture
Source Calculated from data in R.E. Evenson and
D. Gollin (2003), Crop Variety
Improvement and its Effect on Productivity.
Wallingford CABI.
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Smith also did not foresee the course
ofdemographic transition in deaths and birth
rates
births
Sweden
slow decline in deaths then births, peak rate of
pop. growth1.5 pct/yr
deaths
Mexico
peak rate 3.5
Crude birth and death rates (per 1000)
Mauritius
pre-1776
Source Keith Montgomery, http//www.uwmc.uwc.edu/
geography/Demotrans
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Africas uniquely late and rapid fall in
mortality when its fertility rates were still
high caused exceptionally rapid population
growth
Africas population growth rate is slowing, but
is still faster than historical rates elsewhere
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Africas cities started small. They grow fast
but cannot absorb everyone, making for rapid
rural population growth
Source Calculated from FAOStat data.
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Sudden improvements in child survival lead to
rising dependency ratios
Demographic burdens and demographic gifts,
1950-2020
Burden of rising child-adult ratio
gift of falling child-adult ratio
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Conclusions

• Smith was pretty much exactly right about the
  importance of agriculture, trade and good
  government
• But he did not know (and could not have known!)
  about
• how science-based RD has transformed
  agriculture, health, transport and
  communications, spreading opportunities for
  specialization and trade
• how falling mortality and income growth lead to
  falling fertility and the demographic transition
• So, extending prosperity to the poorest regions
  requires
• new technologies to overcome geographic
  constraints, and
• enough patience to complete the demographic
  transition, perhaps with the help of foreign aid
  and out-migration