What is Emergence? Can economic history explain emergence?

More than half the world’s population live in societies that economists call “emerging economies”. The phenomenon of emergence is by far the most exciting long-term economic process that the world has been living through. One would expect that economic historians would be busy debating what emergence is, and why it happens. They are not. Neither is economic history a living thriving discipline in the emerging economies, nor are economic historians based in the developed world asking such questions, which leads to this essay.

What is emergence? We use the term when a poor (and usually large) country grows much faster than the world average growth. Consider the Figure below about South Asian growth to see what is meant. The red line in the Figure is the trend-line that tracks annual growth rates in South Asia. The blue line tracks world annual growth. The former was below the latter until the early-1980s, and then there was a reversal.

Figure 2 Convergence

Figure 1. Relative Growth Rates: South Asia and the World 1960-2016

The Figure immediately raises a problem that makes explaining emergence a complicated task. Emergence entails a sharp turnaround, a shift of trend, a sudden reversal from falling-behind to speeding ahead. It is not just any economic growth, but a burst of growth that follows years of stagnation. Because it is a burst of growth, conventional economic growth theory – which stresses accumulation of some sort of capital – does not help us understand emergence. Conventional theory does not account for bursts as such. In fact, accumulation of capital is usually a slow process.

What, then, explains emergence? Economic history seems to offer three types of answer, which I will call Smithian, Institutionist, and Statist.

Smithian or classical growth is a well-used term in economic history. It refers to the situation where a market opportunity opens up for a so-far isolated region that has a lot of underutilized resources like land and labour. The initial shock could come from a change in transportation technology, or political unification, or technological change that creates new demand for a resource. Adam Smith, after whom Smithian growth is named, understood that the process could generate incentives to invest in productivity. If all circumstances are favourable, the shock could lead to a burst of growth.

The Burmese-British economist Hla Myint explained tropical growth in the nineteenth century as an episode of Smithian growth. That India’s emergence (or China’s from a few years before) did have a Smithian element cannot be denied. In both, labour was abundant, underemployment rife, and labour-intensive services or manufacturing led the turnaround. But both countries have quickly moved into using high levels of technology (India leads the non-western world in information technology or pharmaceutical production, for example), which does not fit the Smithian pattern.

The institutionist story appeared to explain Western Europe’s emergence 200 years ago, and stresses the contribution of business-friendly law, good governance, or incentive systems in causing a sharp turnaround in Europe’s growth from the 1820s. Might a similar story be told for Asia and Africa in the late-twentieth century? This remains very doubtful. The more recent turnaround happened in the absence of a prior improvement in the measurable indicators of good institutions. India, for example, gets very bad scores on Global Competitiveness index, and the Ease of Doing Business index a quarter century after its emergence began. Institutions are out too.

The statist story became popular between 1980 and 1997 to explain the emergence of what were called the newly-industrializing economies of East Asia, like South Korea. The argument was that the political elite of a country that consciously tries to catch up with a leader, needs its state to play a developmental role. The role could take many forms, direct investment, regulation of allocation of capital, or protectionism. The statist model had its origins in the writings of the Harvard economic historian Alexander Gerschenkron, was initially applied to Germany and Imperial Russia, later to Meiji Japan and postwar Japan, and one of its variants became known as the late-industrialization or late-development model that drew its main evidence from East Asia.

The statist model of emergence was a sort of orthodoxy on emergence until the Asian crisis of 1997 took some wind off its sails. The statist model too is unconvincing as a tool to do global economic history. Consider Figure 1 again. During much of the 1950s, 1960s, and the 1970s, India had as much of a developmental state as any other country in the world, and its political class was hugely proud of that fact, but the state did not deliver emergence, it delivered a regression instead.

I will define and explain emergence differently from all three, but after doing so, will also draw on some fundamental insight of all three to enrich the definition.

Emergence, in my definition, is a re-balancing of the relationship between the world economy and the national economy such that a poor country can buy useful knowledge from the world by selling something that it has in abundance. The key to emergence is not in unutilized resources (as in Smithian growth), institutional engineering (as in Institutionism) or public finance (as in Statism). The key is in the balance of payments. It doesn’t matter if you sell services as Indians do or industrial goods as the Chinese do, but it does matter that these sales create the prospect of an inflow of knowledge in the shape of machines and skilled people.

Smithian growth is relevant, because the pace of inflow of knowledge depends on resource endowments that shape the power to purchase knowledge. State is important because it is the State that decides to keep markets open. If this is relatively easy with trade, keeping factor markets open is much harder to achieve politically. But this is important. Technological change happens when people who embody complementary skills can interact freely. Not many States are open to the idea of free movements of people. India, despite openness in some areas, is still cagey about skilled foreigners coming into work in India. Institutions are important because if corruption and bad governance persist, sooner or later the benefits of emergence would dry up.

But the foundation of emergence itself is a transaction on a global scale. In principle, South Asia, the region shown in the Figure but it is only one example, could potentially achieve this transaction in the 1950s instead of the 1990s. So could China. They deliberately blocked the prospect, thinking that hermetic isolation was the best way to develop capability. Nothing could be further from the truth. Knowledge grows by exchange. Cosmopolitanism is necessary for the task.

Tirthankar Roy

Professor of Economic History, London School of Economics

October 2018

 

 

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