How Did the West Get Rich? Alternative Stories and Alternative Lessons Luiz Carlos Bresser-Pereira

(Prepared as a bases for remarks delivered at the panel on “The New Development Economics: Critical Perspectives,” at the Left Forum, New York, March 11, 2006.)

The new development economics – and, more generally, the neo-liberal approach to economics – is based on certain ideas about markets and private property, in particular the idea that when property rights are secure and markets are allowed to function economic growth will be the salutary result. The condition that “markets are allowed to function” includes international markets, and an advocacy of free trade is certainly one of the hallmarks of the new development economics. Property rights and effective markets carry the corollary need for “good governance,” a state that, without excessive corruption, protects property, enforces contracts, provides the infrastructure – including the financial infrastructure – for commerce, and, of course, assures “law and order.” Other things help: for example, a favorable endowment of natural resources such as good land, water, essential mineral deposits, and a favorable location for international commerce. It is, however, the institutions that are central: markets, property rights, and good governance.

While many rationales and an extensive stock of empirical studies are offered in support of the new development economics, perhaps the most important supporting argument is a particular historical story, an answer to the question: How did the West get rich while the rest of the world remained poor? An answer to this question provides a foundation for the answer to the next question: What should the rest of the world do to become rich like the West?

The West got rich, so the story goes, because it developed secure property rights, markets, and good governance. There are other parts to the story. In some versions, the proper attitude towards science and a high level of literacy are important components, and Weber’s “spirit of capitalism” and “the Protestant ethic” are sometimes included. Even before Europe emerged to economically lead – and dominate – the rest of the world, its advantages are alleged to have been evident (at least with hindsight): more capital stock, slightly higher incomes, smaller families, slightly greater life expectancy, and a more equal distribution of income. The basic idea is that the West – most especially Britain, but also other parts of Northwestern Europe and then the United States – had these institutions and characteristics while the rest of the world did not. China and India, for example, had ancient civilizations and had developed various technologies far in advance of the West. According to the story, however, they failed to develop effective markets, secure property rights, and good governance. So the West moved ahead.

But what if the story is wrong? What if, for example, other parts of the world had very similar institutions to those that the West had – the markets, the property rights, the good governance, and even “the spirit of capitalism,” and what if the claims about income levels, life spans, capital stock, and income distribution in the pre-modern era are incorrect, but sometime around the end of the 18th century, the West moved ahead anyway? If this were so, then it would suggest not that markets and all that were irrelevant, not even that they were not an important part of the conditions for economic expansion. It would, however, suggest that something else was involved, that the market nexus was not sufficient and does not lie at the center of the story of economic success. It would also suggest that one of the pillars on which the new development economics has been constructed is imaginary.

It turns out that the Eurocentric foundation of the new development economics has in fact been subjected to increasing challenge in recent years. Yet it seems that little has been done to connect this challenge to the historical story with a critique of the new development economics. That is what I would like to do here.

There are various versions of this challenge, but one that I have found especially effective and stimulating is Kenneth Pomeranz’s The Great Divergence: China, Europe, and the Making of the Modern World. Pomeranz subjects the Eurocentric view to a detailed refutation and provides, primarily by way of comparison with China, a convincing argument that Europe cannot be viewed as “special” in the pre-modern era in ways that might have laid the foundation for the “great divergence” that took place around the end of the 18th century.

One of the bases of Pomeranz’s critique of the traditional Europe-China comparison – or, worse yet, the traditional Britain-China comparison – is that the geographic units of comparison are inappropriate. If, for example, conditions in Western Europe are compared with those in the Yangzi delta, the results are different than if the units of comparison are Britain and all of China. Pomeranz’s critique is also based on a rejection of using Europe as the norm and European economic organization as the context in which other regions’ activities are evaluated. And he brings to the issue a more thorough consideration of the data than is typical of various Eurocentric arguments; especially important is his consideration of sources of data for China and his use of recent studies in particular.

These comparisons lead Pomeranz to reject a series of “facts” about the differences between Europe and Asia (or parts of Asia) in the pre-modern era. For example, Pomeranz presents data showing that in various regions of Asia life expectancy in the pre-modern era was as great as that in England and elsewhere in Europe. Likewise, Asians seem to have limited family size (enhancing accumulation) as did Europeans, though in different ways. Pomeranz also argues that, in spite of Europeans’ greater stock of domesticated animals, there is little reason to believe that they had a greater capital stock overall than did their counterparts in various parts of Asia. Moreover, within the Chinese rice-growing context, there was much less need for animal power than in the European wheat-growing context; so what was advantageous by the European norm was not so important in China.

More important than these “simple” matters of fact, however, Pomeranz also disputes a whole set of Eurocentric ideas about the difference between the institutional conditions in Europe and those in Asia – again, particularly China. According to Pomeranz, labor markets and land markets were well developed in large regions of pre-modern China, at least by comparison to Europe. Also, markets in commodities and consumption patterns do not seem to have been more advantageous to long run economic growth in Europe as compared to Asia. Pomeranz does not claim that the different regions of the world that he examines were equivalent in all of these respects, and he does allow that in some important ways Europe – or parts of Europe – had distinct advantages. These advantages, however, were not sufficient to explain the later divergence.

But if Europe was not “special” in the pre-modern era, what accounts for the “great divergence”? No one disputes that sometime around the end of the 18th century Europe (and its offshoots, especially the United States) began to pull away from the rest of the world in term of per capita income, so that by the 20th century there was a huge gap between incomes in Europe and those in most of the rest of the world. If we cannot identify the origin of this divergence in something special about Europe, what is the origin?

The alternative to European special-ness is one of two stories or, as is the case with Pomeranz’s own explanation, some combination of those two stories. One of these alternative explanations is that Europe’s relation with the Americas was at the foundation of its relative success. The other explanation is that the relative success was a consequence of lucky circumstances.

Europe’s relation with the Americas is especially significant because, insofar as it is important in explaining the rise of the West, it means that the economic success of Europe and the United States was to a large degree based on coercion, the very violent treatment of non-European peoples in both the Americas and Africa. Perhaps the alternative story most damning – to Europeans’ sense of satisfaction with their position in the world – is the Eric Williams thesis. The Williams thesis is that it was slavery – both the slave trade and production based on slavery in the West Indies – that provided a surplus crucial to the foundation of the industrial revolution in Britain.

Pomeranz neither accepts nor rejects the Williams thesis, but instead says that the evidence is insufficient to draw a clear conclusion regarding the quantitative role of slavery in financing the industrial revolution. I find Pomeranz’s rejection of the Williams thesis less than convincing, especially as he makes no mention of the studies which provide the best support for it in recent decades. My reading of these studies leads me to view the Williams thesis more favorably, especially when stated in its weak form – that slavery played an important role in providing the financing of Britain’s industrial expansion in the 18th century – rather than its strong form – that slavery is the explanation for that industrial expansion.

Pomeranz, however, ignores neither the enslavement of Africans nor the destruction by epidemics and the violence done to the peoples of the Americas. He certainly recognizes that coercion and violence were foundations of Europe’s overseas activities. But for him the particular way in which the Americas contributed to the great divergence of Europe from the rest of world was different than in the Williams thesis. Pomeranz argues that connection to and control of the Americas gave Europe, especially Britain, the capacity to overcome environmental constraints that had previously limited the economic growth of Europe, that were continuing to limit economic expansion in much of Asia, and that would have continued to constrain growth in Europe. Without the fuel, food, fiber and building materials from the Americas, Pomeranz argues, it would have been extremely unlikely that Britain and Europe generally would have been able to continue on a strong upward growth trajectory into the 19th century. Without that growth, the important technological innovations of the 19th century would have been unlikely. The great divergence itself would probably not have taken place.

In Pomeranz’s story, it was not the Americas alone that led to the rise of the West. In addition, he argues that coal played an important role. Of course China had coal too. However, British coal, and later continental coal, was located close to industrial and urban centers, allowing its full exploitation and the interaction of that exploitation with other aspects of industrial advance, while Chinese coal was located far from the centers of Chinese progress (the Yangzi delta). Moreover, particular features of British coal sites gave additional impetus to its important role in the industrial success of the country. So the location and particular nature of coal deposits provide the lucky parts of Pomeranz’s story.

Even if one accepts this alternative story of the great divergence – or, for that matter, another alternative story such as that embodied in the Eric Williams thesis – the markets story of European success does not necessarily become irrelevant. One could easily argue that without an effective market nexus (including property rights and good governance), slavery, the exploitation of the Americas, and coal would not have had the same implications for economic change. These alternative stories do, however, imply that the market nexus itself was not a sufficient base for economic progress. Had these sorts of conditions been sufficient, then we would have seen continued economic expansion in China – at least in the Yangzi delta – after 1750, and there would have been no great divergence. Thus the historical experience suggest that the market argument of the new economic development – getting the prices right, as it is often presented – is not a meaningful prescription for economic success.

More than that. The alternative stories of the great divergence have in them a much greater role for state action, for state support of economic change. A good part of that economic support came in the form of coercion, the role of colonial powers sponsoring the slave trade and in controlling the economies of the so-called periphery. In the alternative stories, whether directly by slavery or through a more complicated process, resources were transferred to the industrial centers and provided essential foundation for economic progress in those centers. Also, the alternative stories contain a significant role for luck.

What guidance do alternative stories of the great divergence then provide for low income countries today and for development economics? One part of the guidance is the negative point that I have already noted: the stories indicate that, contrary to the new development economics, the market nexus in itself is not likely to yield continuing progress. On the positive side, they suggest that if markets are to yield the favorable growth consequences that they did in Europe, they are not likely to do so without extensive state support – support far beyond the good governance prescription. Such guidance, of course, is in direct contradiction to the axioms of the new development economics.

The alternative stories also provide us with some lessons about international commerce. They are positive lessons, indicating that foreign commerce can play important, perhaps essential, roles in a country’s or a region’s economic progress. They are not, however, lessons that prescribe “free trade.” The experience as set out in the alternative stories suggests that state promotion and protection of particular kinds of foreign commerce can play a major role in furthering economic growth.

Of course one could also take the lesson from these alternative stories that the road to economic progress depends upon coercion, to say nothing of luck. However, coercion – at least the explicit coercion of peoples in other regions – is not an acceptable policy prescription, and luck cannot be prescribed. Still, there are lessons to be learned from the European dependence on coercion and luck. One broad lesson is that the international context is likely to play a very important role in any country’s economic progress. As Europe relied on foreign resources, it is probably the case that for other country’s to progress economically resources from outside are important if not essential. Certainly, the kind of resource extraction from low income countries that characterizes the current era cannot be a foundation for progress.

Once we recognize the importance of the international context, then it should become immediately apparent that there are no direct lessons from historical stories – from either the standard neo-liberal stories or the alternatives. If we allow that the international context of the pre-modern era was a crucial context for the divergence of Europe from the rest of the world, then is should be obvious that the rest of the world cannot do things the same way. For Europe’s divergence irrevocably altered the international context. With a dramatically altered international context, the European option – however we describe it – is not available. We cannot step in the same river twice.

Thus it is a crucial part of the foundation of the new development economics not only that it present its highly contested view of world history, but within its historical story that the international context be given a relatively minor role. Because “we cannot step in the same river twice” and because the new development economics would prescribe the European experience as a model for current-day development, international relations cannot be at the center of the story. Instead we have: the nations of the “West” did it on their own, and so the low-income countries of today should be able to do it on their own as well.

While I believe that the international context was in fact very important for Europe’s success, I do not believe that a similar international context can be created today. There are those – for example people who have lined up behind the UN Millennium Goals – who seem to think that large amounts of foreign aid could provide the low-income countries of today with the international context they need to succeed. Both the history of foreign aid and the current political climate in high-income countries (especially the United States) make one rather skeptical of the success of this approach. There may be some ways in which governments of low-income countries, banding together, could affect the international context. Recent challenges to the rich countries’ program for international agreements, challenges coming from both the governments of low-income countries and popular movements, give some credence to this option. Skepticism notwithstanding, there is every reason to continue to emphasize the rich countries’ obligation to provide foreign aid; and certainly the challenges to the rich countries’ programs should be supported.

It is, however, not simply the international context that is important for a country’s economic development, but also the relationship of a country’s economy to that international context. With limited control over the context, perhaps the focus should be on the relationship. Virtually all economic development success – whether that of the great divergence or more modern experiences, for example, in East Asia – supports the observation that state intervention in a country’s foreign commerce is an essential foundation for economic growth, at least as essential as the market nexus.

History certainly provides some important lessons about economic development, but they are not the lessons that are touted by the new development economics. History may even provide some lessons about how to shape economic development so that it is both democratic and egalitarian. But those are lessons for another day.

Arthur MacEwan, Department of Economics, University of Massachusetts, Boston