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The year 1776 produced some great new ideas

The Wealth and Poverty of Nations:  What have we learned since Adam Smith? Will Masters Department of Agricultural Economics Purdue University www.agecon.purdue.edu/staff/masters ICEE Econ Camp Brookston, IN October 16 th , 2007. The year 1776 produced some great new ideas.

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The year 1776 produced some great new ideas

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  1. 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

  2. The year 1776 produced some great new ideas …and in Scotland, modern economics! In the United States, modern democracy…

  3. 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 Smith’s 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

  4. 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)

  5. 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)

  6. 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)

  7. 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

  8. 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 1776 World ave. E.Eur. Fmr.USSR Source: Calculated from data in Angus Maddison (2001), The World Economy: A Millenial Perspective. Paris: OECD.

  9. …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.

  10. Idea #1: Geographic location still matters!only the tropics are still poor Source: J.D. Sachs, 2001. “Tropical Underdevelopment.” NBER Working Paper 8119.

  11. …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.

  12. 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.

  13. Idea #2: Quality of government matters Successful governance is both cause and consequence of per-capita income

  14. 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 <http://esa.un.org/unpp>

  15. The contrast between S. Asia and Africa is greatest in agriculture FAO index value, 1961=100 Source: calculated from FAO data, at http://apps.fao.org.

  16. Asia’s agricultural successes have been mainly in food production Source: calculated from FAO data, at http://apps.fao.org.

  17. Food production matters; undernutrition remains the world’s #1 cause of ill-health

  18. Explaining Africa’s lag brings us to what Adam Smith did not know… …such as the power of R&D 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.

  19. 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. growth≈1.5 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

  20. Africa’s uniquely late and rapid fall in mortality when its fertility rates were still high caused exceptionally rapid population growth: Africa’s population growth rate is slowing, but is still faster than historical rates elsewhere

  21. Africa’s cities started small. They grow fast but cannot absorb everyone, making for rapid rural population growth Source: Calculated from FAOStat data.

  22. 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

  23. 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 R&D 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

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