The Indian Economy Blog

January 26, 2008

International Trade, Population and Productivity

Filed under: Basic Questions,Economic History,Growth,Human Capital,Trade — Pragmatic @ 5:33 pm

A new research paper titled Trading Population for Productivity: Theory and Evidence by Oded Galor and Andrew Mountford focuses on a novel Unified Growth Theory. The paper argues that the -

differential effect of international trade on the demand for human capital across countries has been a major determinant of the distribution of income and population across the globe. In developed countries the gains from trade have been directed towards investment in education and growth in income per capita, whereas a significant portion of these gains in less developed economies have been channeled towards population growth. Cross-country regressions establish that indeed trade has positive effects on fertility and negative effects on education in non-OECD economies, while inducing fertility decline and human capital formation in OECD economies.

The researchers suggest that more than “the geographical and institutional factors, human capital formation, ethnic, linguistic and religious fractionalization, colonialism and globalization”, it is international trade that has had an “asymmetrical effect on the evolution of industrial and non-industrial economies” leading to a remarkable change in the distribution of world income in the past two centuries.

The expansion of international trade in the second phase of the Industrial Revolution enhanced the specialization of industrial economies in the production of industrial, skilled intensive, goods. The associated rise in the demand for skilled labor has induced a gradual investment in the quality of the population, expediting a demographic transition, stimulating technological progress and further enhancing the comparative advantage of these industrial economies in the production of skilled intensive goods. In non-industrial economies, in contrast, international trade has generated an incentive to specialize in the production of unskilled intensive, non-industrial, goods. The absence of significant demand for human capital has provided limited incentives to invest in the quality of the population and the gains from trade have been utilized primarily for a further increase in the size of the population, rather than the income of the existing population. The demographic transition in these non-industrial economies has been significantly delayed, increasing further their relative abundance of unskilled labor, enhancing their comparative disadvantage in the production of skilled intensive goods and delaying their process of development.

The most interesting portion of the paper is Part 6, the one dealing with Historical Evidence, which includes an analysis of the contrasting paths of development of UK and India over the last two centuries.

The evidence demonstrates that during the nineteenth century the UK traded manufactured goods for primary products with India. Consistent with the proposed hypothesis, industrialization in India regressed over this century whereas industrialization in the UK accelerated. The process of industrialization in the UK led to a significant increase in the demand for skilled labor in the second phase of the industrial revolution, triggering a demographic transition and a transition to a state of sustained economic growth. In India, in contrast, the lack of demand for skilled labor delayed the demographic transition and the process of development. Thus, while the gains from trade were utilized in the UK primarily towards an increase in output per capita, in India they were more biased towards an increase in the size of the population.

The concluding remark about the “slow transition of less developed economies into a state of sustained economic growth” is likely to gladden the hearts of most Indians. If “international trade accentuates the initial patterns of comparative advantage” and once India has slowly transited onto the path of sustained growth, then the Indian policy makers can rejoice at having done all the dirty, hard work. The growth trajectories of population, human capital and per capita income will take care of themselves, courtesy the Unified Growth Theory. Is it really that simple?

18 Comments »

  1. [...] [Crossposted at the Indian Economy Blog] [...]

    Pingback by Pragmatic Euphony » Blog Archive » International trade, population & productivity — January 27, 2008 @ 12:05 am

  2. India missed development because of self inflicted wounds.Why would south korea come from rags to riches since 1960. Even if india started its progress immediately after independance india
    would have had per capita income on par with europe. It is ridiculous to blame Britain for all the suffering. It’s a lame man’s excuse. India will likely to suffer from US recession, higher oil prices and large merchandize deficit. In 1990 and 2000′s india escaped suffering due to its software exports and made some progress.

    Comment by Satish — January 27, 2008 @ 12:35 am

  3. To Satish,
    India suffered from both self-inflicted wounds and British economic loot. If you look at the GDP trends from 1757 to 1857, there was no growth in India’s per capita income. India’s share of the world GDP fell precipitously in the same period. Of course it didn’t help that India adopted Socialism post-1950.

    And stop the Korea comparison,Korea is a much smaller country than India, and consequenly took a shorter time to develop. Larger countries take a much longer time, if you look at China now or the USA in the 19th century. And korea was never colonized,and there are a lot of poor is Korea,(if Korea is so great, why do so many of Koreans immigrate to the US?). Stop being an Uncle Tom and open your eyes

    Comment by AS — January 28, 2008 @ 2:36 am

  4. Interesting comparison of how exactly GDP share has changed over last 2000 years and India existed and lost
    http://www.theworldeconomy.org/publications/worldeconomy/MaddisontableB-18.pdf
    though I’m sure lot of assumptions has gone in this calculation which I’m not aware of
    specifically after 1820

    Comment by swaptions7 — January 28, 2008 @ 12:54 pm

  5. AS: India suffers from more loot from it’s own politicians for last 60 years. No need to blame British for most of economic woes.

    I think at present India growth story is just a big bubble waiting to get bust. I was reading another article which detailed real estate prices in Mumbai. The prices have gone insane, where it costs more to buy a condo in Santacruz, Mumbai than Manahattan.

    http://indiahousingbubble.blogspot.com/2008/01/insane-housing-prices-in-mumbai.html

    Is this for real? what would be impact in long term of such high prices?

    Comment by Shailesh — January 29, 2008 @ 2:53 am

  6. Shailesh:For say blaming british or Indian politician (who happens to come….well… mostly from India, from you and me)will not change much but there are enough anecdotal evidence and stats to show that India lost most of its so called glory during the british as well as socialist periods, India’s GDP share fell sharply after 1820′s..either it did not grow as fast as the world or may be the industrial revolution of west spurred a huge rate of growth in rest of the world…or both

    Comment by swaptions7 — January 29, 2008 @ 12:15 pm

  7. Hi,
    I am doing economic history of India during the 17th and 18th century. Could you please tell me as from where you got the GDP growth rate for India from 1757 onwards? I will be very happy to find out such GDP rate. I am absolutely in agreement with you that India was plundered during the colonial rule but I wonder if India was a unified whole to calculate any GDP rate since 1757. Please illuminate.

    Comment by mk — January 31, 2008 @ 3:20 am

  8. AC,
    I could hardly understand what was there in india to loot since
    1900(i dont know what was there before). If india had started by then, thing could be far better. Infact British was fostering a better india by then by developing industries.Even socialism had better effects on soviet USSR. Lifestyle was far better than czarist russia. Indian beaurocrats has to be blamed for all troubles rather than any system. Whole trouble was self inflicted
    rather than anything else.

    Comment by satish — January 31, 2008 @ 6:31 am

  9. satish,
    you seem to hugely ignorant of history when you say “what was there in india to loot since 1900″ and even before. India was world’s largest manufacturing economy till the 18th century, leave alone its agricultural production to sustain the craft manufacturing population. You could do better service to yourself by reading some basic text-books before sounding too imperialist.

    Comment by MK — January 31, 2008 @ 7:09 pm

  10. The Unified Growth Theory assumes a certain homogeneity across development in a nation.

    However, what we are seeing in countries like India and China is the exaggeration of economic inequalities, such that the rich are getting comparable with the rich in the developed countries, while the poor get poorer (in relative terms at least).

    So no, it is not that simple.

    Comment by Kiran — February 2, 2008 @ 5:40 am

  11. British invested on railways, postal services, tea etc. but was reluctant to promote Iron and steel, textile mills which were pillars of British empire. JRD was allowed for tata steel only in 1899 by lord Curzon only when Britain had lost its monopoly of world steel market to Belgium, Germany etc.
    Looting does not necessarily mean taking out gold/Jewelry from India to Britain(though that happened) but forcing opium cultivation, killing the textiles industry and selling processed cotton (clothes) from Manchester and not allowing any such industry to be set up in India is also looting.
    For Satish if you want to believe what u already seem to believe there was nothing in India…u can find that in James Mill, History of India..which later formed the basis of british colonization terming all east has can be contained in half selve of a british library (I don’t remember the exact quote)…this guy never visited india.
    Or if you want you can start with Albruni’s India the Iranian Arab traveller who stayed in India for 13 years (around 1030 AD)and translated most of the work from sankrit to arabic…and end with Romila Thapar..both of which gives bad as well as good things that were present

    Just a pointer….if colonization was to promote good governance why are most colonial country still in 3rd world?
    Also a little to harsh criticism on colonial rule in”John Newsinger’s The blood never dried”

    Comment by swaptions7 — February 3, 2008 @ 11:39 am

  12. “why are most colonial country still in 3rd world?”
    List of first world countries that were colonies:
    1. United States (Britain)
    2. Australia (Britain)
    3. Canada (Britain)
    4. New Zealand (Britain)
    5. Singapore (Britain, Japan)
    Other non-third world countries:
    South Korea (Japan)
    Ireland (Britain)
    Most of the Middle East (Britain, France)

    Comment by KK — February 3, 2008 @ 7:17 pm

  13. Well let me keep it in bold “Why are MOST colonial country still in 3rd world?” there are more than 50 countries (may be 100..may be more) that were colonized..above is the list of 8
    Also the term third world came after 2nd world war (which was also the end of imperalism..that we knew of…I don’t want to discuss..US imperialism:-)) so comparison of US/Canada may not be relevant in terms of colonization…I’m not sure.
    Also I can argue abt the colonization/de-colonization of US /Australia/New zeland….where the original race were marginalized anyway?
    My point was simple I can’t think why should a country/community/race come, crossing half of the world to improve “governance/industry”…to “take up white man’s burden”?

    Comment by swaptions7 — February 3, 2008 @ 9:03 pm

  14. If you are saying a “white man” must not try to rule over “non-white men”, then thats racism and I will not comment on that.

    If you are saying, one community must not rule over another, or one country must not rule over another, or one race must not rule over another race, then read up on some Indian history. If the Brits conquered India and decided to exploit India – well bad luck. We would have done the same if we could – we were just not powerful enough. When we could, we conquered SE Asia and Indonesia. Even Sri Lanka. Well you could argue North Indian kings invaded South India. Or the Marathas of Maharashtra conquered non-Marathi-speaking people. Meaningless arguments of course.

    The Brits themselves were conquered by the Romans and the Vikings – but they dont blame Caesar or William for their current day problems. We have been independent for over 50 years. Lots of countries overtook us after that.

    Comment by KK — February 4, 2008 @ 1:35 am

  15. “take up white man’s burden”? is from our great imperial poet and Moglee famed Kipling on US occupation of phillipine…
    I’m no one to comment what is “should” and “Must” but my point is simple…
    If one country/race/… is conquered by another distinct one, mostly it will be for the benfit of the conquerer and it seems you too agree on the same.
    Also on Indian History as well as world history there has been conquest by the stronger nation/race/religion on another. So indian history is not very differnt.

    Comment by swaptions7 — February 4, 2008 @ 9:34 am

  16. I admire swaptions7. In spite of having been refuted on multiple occasions, he/she comes back for more punishment. Good show! Anyway, from reading Angus McFadden’s book, it appears that India’s glory days were numbered by early 1000, where the per-capita GDP of the Indian subcontinent was already being crossed in Western Europe. Of course, given India’s historical (and current) gift on the population front, the overall GDP was not overtaken until the late 1700s. Given that human beings have not really evolved much in the last few thousand years, a study of history would be instructive in divining future shifts in economic activity. I have a rather controversial theory regarding India’s decline.

    With the advent of the Moghuls, and their practice of decapitating the intellectuals and aristocrats of the conquered lands, a substantial source of the fountain of innovation and enterprise was lost. In most societies, including Western ones, the contributions of a few individuals (the top 0.1%) of the population in terms of technology and arts make a huge difference in the evolution of that society. Take out these individuals, and society suffers a big blow. As Tata put it so eloquently, a society which allows its very best to achieve their maximum potential will reap rewards compared to one where the emphasis is on helping the poor.

    No matter how many boatloads of foodgrains are shipped to Sub-saharan Africa or India, they are not going to become developed societies. It requires a fundamental shift in the culture.

    Comment by Observer — February 4, 2008 @ 6:44 pm

  17. Observer
    “I admire swaptions7. In spite of having been refuted on multiple occasions, he/she comes back for more punishment.”

    I don’t mind getting punished as long as my only point is well taken:-)..

    “If one country/race/… is conquered by another distinct one, mostly it will be for the benefit of the conqueror ” and britain and India did not have any exception in the relation…

    PS:”With the advent of the Moghuls, and their practice of decapitating the intellectuals and aristocrats of the conquered lands…” I would have argued against this oversimplified generalization …pointer…”Argumentative Indian-Amartya Sen”…but lets save that for some other day :-)

    Comment by swaptions7 — February 4, 2008 @ 10:57 pm

  18. What was there in India before 1900 and after 1900? Well, my dear uncle toms defending colonialism here…why don’t you ask your “masters” what kept them here after 1900 when there was nothing to loot? oooops, I am sorry, me a dirty uncouth native, I forgot that your “masters” were here in a noble mission to civilize the heathen. Unfortunately, as you can see they did not do a good job of that either (me being an example).

    Anyway, India went from foreign colonialism to Anglicized Indian colonialism in ’47. Technically India is still colonized by a minority english speaking elite that has bled whatever that remained of the rest of the population in the name of socialism.

    Nobody here talks about the destruction of artisans and they way of life with the “outsourcing” of textiles by the english which in turn gave rise to poverty and lingering caste issues. Not a word about the stiff duties imposed with international trade. Or the very “efficient” taxation of agriculture whose effects we are still living today.

    Comment by sherkhan — February 5, 2008 @ 10:06 pm

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